Schedule a Renovation Consultation

What Is A Renovation Loan?

A renovation loan is a mortgage, just like any other mortgage, but where a regular mortgage is based on the current condition and value of the property, a renovation loan is based on the future value and condition of the property. A renovation loan can be used for either purchasing or refinancing a home and it includes additional funds to complete necessary repairs and/or desired improvements. The loan closes on the property in its current condition, the renovation funds are placed in escrow (like a savings account), work begins immediately after closing, and the money is paid out of escrow as the work is completed. It is a one-time close transaction with one set of closing costs, so once the renovations are completed, there is nothing else you need to do. You just continue to make your regular monthly mortgage payments like any other mortgage. The Renovation Loans are programs that are backed by Fannie Mae (conventional) and FHA (government) and they have the exact same financial qualification requirements as non-renovation loans. Terms of these loans are most commonly set at 30-year fixed rates.

Please complete the form to the right to discuss all of our Renovation program options with one of our Home Design Mortgage Specialists!

Programs

Homestyle (FANNIE MAE)

  • Conventional loan favors credit scores >700 
  • Max loan amount for 2022 is $647,200 (select counties have higher limits) 
  • Renovation costs limited to 75% of as-completed-value 
  • Cosmetic/structural AND luxury items allowed 
  • 3% down for owner-occupied/10% for 2nd home/15%-25% for rental properties

FHA 203 (K)

  • More favorable terms for less than perfect credit 
  • Max loan amount set annually by FHA. Varies by county 
  • Cosmetic and structural repairs allowed. No luxury items 
  • Owner-occupied transactions only. 1-4 unit properties 
  • 3.5% minimum down payment for purchase loans

FHA 203 (K) Limited/Streamline

  • Same as FHA 203k but cosmetic repairs only
  • Limited to total renovation costs of $35,000 (approximately $30,000 in renovation budget)

The Process

Initial Consultation

It is important to select a loan officer that has experience with renovation loans. An experienced renovation specialist will discuss with you all the different options of loan types, specifics about financial qualifications, review the process, and demonstrate a plan of action. A renovation loan is not for everyone, and it’s important to be educated to ensure if it’s the right fit for you.

Selecting a Contractor

It’s up to you to select your contractor, but there are a few things to keep in mind while making your decision. 

    • While not a strict requirement, it is highly recommended that you select a general contractor to coordinate the renovations. 
    • There are contractual documents required by each renovation loan program that the contractor will need to agree to and execute.
    • All contractors must be fully insured and licensed, and will be required to provide documentation to your lender.
    • All renovation loan programs have very specific requirements for the format of the renovation cost estimate, or “Bid”. It is highly recommended that you share the specific requirements with your contractor very early in the process to eliminate duplication of effort and lost time.
    • Each renovation loan program allows a limited initial material draw on funds at the closing of the loan, and 1-4 additional draws during the renovation process depending on the specific loan program.

Third Party Inspector

To protect their interest in doing the loan, some renovation loan programs may require that a 3rd party inspector oversee certain aspects of the renovation process. As a rule of thumb, if any of the renovations are structural in nature or if the total renovation budget exceeds $35,000 then a 3rd party inspector will be required. The FHA 203K program requires the use of a HUD consultant, however the Fannie Mae homestyle renovation loan allows the use of any approved third-party construction consultant.

The Appraisal

In a Renovation Loan transaction, an appraiser will use your contractor’s cost estimate and/or floor plans for the proposed renovations and base the value of the home on the assumption of that work being completed. To do this, they will look for other homes near the subject property with a high degree of similarity to the proposed fully renovated floor plan. This is a very important step in the process as the value of these “future” comparable homes must support the cost of the renovations being proposed.

Closing & Renovation

At closing, the renovation funds (minus any initial material draw at closing) are sent to the renovation loan investor to establish the renovation escrow account and it may take up to thirty (30) days for the renovation escrow account to be fully set up and ready to draw from. Any time after closing (once the required permits are obtained), preferably immediately, your contractor may begin the renovations. As work is completed your contractor may request additional payments (progress draws) from the renovation escrow account. For each progress draw requested the third party inspector will need to verify the work that has been completed and then authorize release of the draw. That cycle will repeat until all of the work has been completed.