A renovation mortgage is a type of mortgage that includes funds for home repairs and improvements. Maybe you want to move into a neighborhood with stellar schools, but the only way you can afford that is by getting a property in less-than-ideal shape. A renovation mortgage can help you buy the home and fund the remodeling.
Whether you’re looking to buy a fixer-upper or renovate a home you already own, you’ll have plenty of options to choose from.
What is a renovation mortgage?
Most mortgages can’t exceed the home’s value minus your equity or down payment. For example, if you want to buy a home that appraises at $200,000 and your lender requires you to put 3% down, the most you can borrow is $194,000.
A renovation mortgage, on the other hand, will provide the extra money required to purchase the home and fix it up — all in a single loan. These loans also have few restrictions on the repairs and upgrades you can make.
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You will, however, need a slightly larger down payment because the loan will be based on the home’s after-renovation value, not the purchase price.
While this article will focus on purchasing mortgages that come with additional funds for repairs, there are other loans — such as a cash-out refinance or home equity loan — that can help you renovate a home you already own.
Learn More: HELOC: Is a Home Equity Line of Credit Right for You?
Should you get a renovation mortgage?
A renovation mortgage for buying a home is best if you:
- Don’t have enough cash for the purchase and repairs
- Want to buy a home in poor condition that wouldn’t normally qualify for financing
- Have the patience to deal with extra loan paperwork and inspections
- Can complete renovations in six to 12 months or less
An all-in-one renovation loan can be simpler and less expensive than getting separate loans for the home purchase and repairs.
The interest rate on a first mortgage is one of the lowest borrowing rates you can get, and you’ll only have to qualify for one loan.
However, renovation mortgages do tend to require extra paperwork and inspections, and they do place some limits on how you can use the money.
When separate loans might be a better idea: A separate home purchase mortgage and home improvement loan could be a better idea if the home’s condition doesn’t prevent you from purchasing it with a non-renovation mortgage, such as a conventional, FHA, VA, or USDA loan.
You’ll likely have fewer administrative headaches if you take out a separate home improvement loan. That’s because you won’t have to get the lender’s approval for the repairs and renovations you want to complete.
Find Out: How Much Does It Cost to Buy a Home?
Pros and cons of a renovation mortgage
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Options for a renovation loan
Four types of renovation loans are available to finance a home’s purchase price plus the cost of repairs:
Fannie Mae HomeStyle Renovation loan
Fannie Mae’s HomeStyle Renovation loan is a conventional mortgage where the amount you can borrow is based on the property’s post-improvement value.
This loan is extremely flexible: You can use it for everything from cosmetic improvements to accessory structures.
Its main limitations are that you can’t use it to tear down and rebuild a home or to build another home on the property.
If the home isn’t habitable, however, you can finance six months of mortgage payments so you can afford to live somewhere else during major construction. Renovations can cost as much as 75% of the home’s post-renovation value.
- Min. credit score: 620
- Min. down payment: 3%
- Residence types: Principal residence (1-4 units); 1-unit second home or investment home; condos and co-ops allowed
- Allowable improvements: Any renovation or repair that is permanently affixed to the property
Freddie Mac CHOICERenovation loan
Freddie Mac’s CHOICERenovation loan is also a conventional loan based on the property’s post-improvement value.
You can use this loan to pay for cosmetic or structural renovations to an existing home, but not to tear down and rebuild a home. You can also use it to renovate or build an accessory unit.
Like Fannie Mae’s offering, you can also finance six months of mortgage payments if necessary, and renovations can cost as much as 75% of the home’s post-renovation value.
- Min. credit score: 620
- Min. down payment: 3%
- Residence types: Principal residence (1-4 units); 1-unit second home or investment home; condos and co-ops allowed
- Allowable improvements: Renovations to an existing dwelling
FHA 203(k) limited loan
The FHA 203(k) limited loan lets you finance a maximum of $35,000 in repairs, and they can’t be structural. You must be able to live in the home for all but 15 days of the work, which has to be completed within six months.
Allowable renovations are generally anything that fixes, upgrades, or modernizes the property, with a few exceptions, such as adding a new swimming pool, hot tub, or tennis court.
- Min. credit score: 500 with 10% down, 580 with 3.5% down
- Min. down payment: 3.5%
- Residence types: Principal residence (1-4 units); condos allowed
- Allowable improvements: Nonstructural repairs and improvements up to $35,000
FHA 203(k) standard loan
An FHA 203(k) standard loan lets you borrow up to 110% of the home’s after-renovation value, and you can use it to make structural repairs.
In fact, you can tear a home down to its foundation and rebuild it. You can also make less drastic structural changes such as home additions.
The requirement to use a 203(k) consultant with this loan adds an expense that other renovation loans don’t entail. You also have to refinance at least $5,000 worth of repairs, and you still can’t make renovations the FHA considers luxuries, like installing a new outdoor fire pit.
- Min. credit score: 500 with 10% down, 580 with 3.5% down
- Min. down payment: 3.5%
- Residence types: Principal residence (1-4 units); condos allowed
- Allowable improvements: Structural and nonstructural repairs and improvements
Learn More:
- Are Condos a Good Investment? Figuring Out the Pros and Cons
- Should You Refinance to Pay for Home Improvements?
Which renovation loan is right for you?
Depending on what you want to do with the property and how good your credit is, one of these renovation loans might be a better fit for you than the others.
If any of the following reasons apply to your situation, consider taking out the respective loan.
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Meet the expert:
Amy Fontinelle
Amy Fontinelle is a personal finance journalist with work featured in Forbes Advisor, The Motley Fool, Investopedia, International Business Times, MassMutual, and more.
