What is a Renovation Loan?

Just bought a fixer upper that needs a lot of work? A home renovation loan gives the homeowner the funds needed to not only purchase the home, but fix it up as well. A home renovation loan should only be considered if the renovation of the home will increase the property value or reduce long-term costs associated with the property. Instead of having to manage two different loans, a home renovation loan allows you to bundle both your mortgage and renovations all into one. 

The way a home renovation loan works depends on what type of financing the homeowner applies for. It also depends on their credit, scope of work and other factors. Let’s take a look at the different types of renovation loans.

Refinancing a current home mortgage can allow a homeowner to receive a cash payout to be used for home improvements.

A home equity loan allows a homeowner to borrow against the equity of their home. The loan depends on the difference between the property’s current market value and the mortgage due by the homeowner. This is also sometimes called a second mortgage. This type of loan has fixed payments that cover both the principal and the interest.  

This type of loan allows you to borrow money for any type of repairs and any type of project (whether it be for your primary home or vacation home). One can also refinance their current home loan to get money for repairs and renovations. The benefit here is the homeowner only has to pay down one loan. This keeps them from having to manage and pay off two separate loans (a home loan and a renovation loan) In a FannieMae Homestyle loan, the money goes into an escrow account that pays the builders and contractors. The homeowner does not have easy access to the money within the loan. 

2. FHA 203(K)

This type of loan is much easier to get than others and requires a lower credit score and down payment. This loan is available for homes that are at least a year old and requires a project that costs at least $5,000. There are two types of FHA 203(K) loans. First is a Limited 203(K) loan that has a maximum of $35,000. Second is a Standard 203(K) loan that is for major construction and renovation projects. A standard loan requires a consultant to be included in all of the renovation plans from start to finish. Neither of these loans can be used for luxury renovations and improvements such as building swimming pools. They also cannot be used on vacation homes and can only be for primary homes. 

There are other types of renovation loans like an EZ “C”onventional loan, which allows the loan to be used with home mortgages that adds value to the property and is non-structural. A Jumbo Renovation is similar to an EZ”C” loan, but used for higher valued homes not covered by other renovation loans. Repairs under a Jumbo Renovation loan must be used to add value to a home and are non-structural. 

Renovations that would benefit from a renovation loan would be projects that truly increase the equity in the home (like finishing a basement, updating bathrooms, renovating your old kitchen), or projects that increase the safety of your home (fixing the roof, rerouting a leaky pipe, and updating your windows). Remember that the main cost of the loan comes in the form of interest paid on the renovation loan over time. Make sure that it makes sense in the long run to take out a renovation loan and won’t just empty out your pockets.

Let us help you with your loan. Ken Venick has over 35 years of experience in the real estate business and we are your one-stop-shop to handle all of your mortgage needs. Contact us today!

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