Whether you are considering kitchen renovations, home office installations, or basement finishes, large-scale home improvements will require a lot of money. A home renovation loan may be your path to moving forward with your project faster than you think. This guide provides an overview of funding options for how to upgrade your home and get a renovation loan.
What is a home renovation loan?
A home renovation loan is a type of funding that involves funding for an upgrade, remodeling, or repair of a home. Something like a common term is something like a regular personal loan, but often takes the form of secured debt. Specifically, it’s a type of loan that uses a home that you’re trying to improve as collateral.
More specifically, the home renovation loans are as follows:
- There is additional money for mortgages, home improvements
- Mortgage products supported by government agencies or government-sponsored businesses that include funds to purchase and upgrade housing at once
- Refinance your current mortgage with cash payments
- Home Equity Loan or Line of Credit (HELOC)
- Personal loans sometimes called home improvement loans
Some home renovation loans or Refis require borrowers to have a certain amount of fairness to their household (the main exception is personal loans that are usually unsecured).
When should I consider a home renovation loan?
There are several scenarios where you can consider a home renovation loan, including:
- Insufficient funds – Your home needs emergency repairs (for example plumbing issues) or just about to need one (sinking foundation) and there is no cash to pay the contractor. Or, it’s a discretionary business, but you don’t want to blow your budget or run out of savings accounts.
- Fixer Upper – If you fall in love with a fixed device or such a house, if you fall in love with a house with a low asking price that requires serious work, some home renovation loans can provide funds to buy and restore your residence.
- Build your home equity – One important way to increase the value of your home ownership (besides paying off your mortgage) is to improve the home itself. Strategically selected renovations are a sensible investment, improving your property value and making your home a more comfortable place to live.
- Increase fair market value – If you want to list your home, there’s nothing to add to the edge of a competitive market like projects that expand habitable space or keep your home up to date and functional.
Whatever your motivation is, keep the value of your home in mind. “We’re looking forward to seeing you in the process of doing things,” said Greg Harris, president of Rendell Kyay Home Loans in Chesterfield, Missouri. “It’s also important to have a positive impact on the value of your home in the long run, so the bathroom, kitchen and additions make the most sense.”
Home renovation loan options
| Loan type | When to use | Minimum credit score | Additional Considerations |
|---|---|---|---|
| Fannie May Home Style | For any project | 620 | Renovation costs limited to 75% of the expected value of the property after Reno |
| Freddie Mac Choicerenovation Loan | Buy and renovate a new home or funding renovation from an existing home | 620 (by lender) | Repairs and renovations cannot exceed 75% of the upgraded home valuation |
| FHA 203 (k) | In many projects, they cannot become a luxurious renovation and must be for your main home | 580 | You must borrow at least $5,000 and the project must be completed within 12 months |
| Home Equity Loan/HELOC | Tax benefits for any project if you’re at home | It depends on the lender | You may pay an extra fee to close, but interest rates tend to be competitive |
| Cash out refinance | For any project | It depends on the lender | You will need at least 20% of the shares to qualify and you will need to pay the closing fee |
| Personal loan | For any project | It depends on the lender | Some loans are limited to $50,000. Interest rates tend to be higher |
| VA Renovation Loan | Buy or refinance a major residence that needs repair/improvement |
620 |
Eligible veterans and active duty are available. Renovations need to improve livability |
| USDA Renovation Loan | Buy or refinance a country home that requires repair/upgrade | 640 | You must be in a rural area eligible for USDA. Borrower income restrictions apply |
Fannie Mae Home Style Renovation Loan
Fannie Mae’s home-style renovation loans allow borrowers to buy places that require repairs or refinance existing mortgages to make money for improvements.
One of the benefits of homestyle loans is that they are a single debt with a monthly payment. You don’t need to take out a mortgage loan and another loan for home repairs. Getting one loan will cut you on time and reduce your closing costs.
The loan money enters another escrow account that is used to pay the contractor. Borrowers have no access to these funds.
You can improve your vacation home or investment property with Fannie Mae Home Style Loans. Additionally, renovations and repairs are eligible for funding, as long as they are permanently attached to the property and add value.
Freddie Mac Choicerenovation Loan
ChoicerEnovation is a loan option offered by Freddie Macs, which allows you to fund the cost of purchasing and renovating your home on a single loan. It is also perfect for homeowners interested in unlimited refinance solutions to enhance or repair current properties.
This loan option allows you to fund renovations of up to 75% of the value of your home after improvement. Renovations must be in an existing home.
Among the eligible real estate types permitted are 1-4 units of main residence, manufactured homes and second homes. One unit development, one unit investment property in a condominium, and one unit qualification.
For small projects, Freddie Mac also offers Choice Reno Express mortgages. Renovations must be completed within 180 days of the mortgage memo date. If your home location is considered an obligation to serve a high-needed area, you can get up to 15% of the home’s value of funds for renovations.
FHA 203 (k) Loan
Like the Fannie and Freddie offerings, FHA 203(k) loans (a traditional government-supported rehabilitation loan) fund home purchases and renovations. The Federal Housing Administration has guaranteed this loan, and its goal is to create more options for homeowners or buyers who need rehabilitation and repairs.
Multiple home types are eligible for a 203(k) loan. These home types include single-family homes, 2-4 family unit homes, mixed-use properties primarily for residential use, and manufactured homes known as real estate.
There are two types of FHA 203(k) loans.
- The limited 203(k) loan cap is $35,000.
- Standard 203(k) loans are for major rehabilitation or construction.
Home Equity Loan/HELOC
A home equity loan is a temporary, fixed-rate thumb loan with monthly payments that remain the same over the loan term. Home Equity’s Credit Line (HELOC) has credit limits and a balanced rotation. This loan is suitable for homeowners who have payments from several large contractors over time on big home improvement projects.
Generally, you will receive one lump sum payment on your home equity loan, but HELOC has a 5-10 year draw period, during which time you will have access to your funds.
Cash-out refinance
With Cash-Out Refi, homeowners can refinance more mortgages than their previous mortgages based on the amount of stock, removing cash differences. Cash-out refinances can double benefit from refinancing a higher-rate mortgage to a lower-rate mortgage while withdrawing cash to spruce your property. Refinance works well if you can get a lower interest rate than your current mortgage interest rate. Lower refinance rates and increased home value due to renovations are major long-term benefits.
Personal loan
If tapping Home Equity is not an option, we recommend considering taking a personal loan. Unlike Refi and Home Equity Loan, personal loans are unsecured, so you don’t need to use your home or other assets as collateral. Loan eligibility is based on your credit score, income and financial history. Consumers with a “very good” FICO credit score of 740 or above will earn the highest interest rates on personal loans, and some lenders will expand their personal loans to consumers with a credit score of 580, but those interest rates tend to be much higher.
VA Renovation Loan
a VA Renovation Loan A government-supported mortgage option that allows eligible US military members, veterans and surviving spouses to fund both the purchase or refinance of a home, and the cost of repairing one loan.
Designed to help borrowers bring assets to the VA’s minimum property standards, the loan eliminates the need for a second loan or high profit credit for renovation costs.
It covers non-structural repairs such as roof replacements, HVAC upgrades, window replacements, kitchen and bathroom upgrades. The work should improve the safety or livability of the property. Luxurious renovations (such as pools and hot tubs) are not usually permitted.
USDA Renovation Loan
a USDA Renovation Loan is a type of government insurance mortgage that allows low-to-middle-income borrowers in eligible rural areas to purchase and renovate their homes with a single mortgage.
USDA loans provided by the USDA Department are designed to make homeowners more affordable in more affordable areas, particularly for homes that require work to meet livable standards. A loan can be used occasionally to buy a home that needs repairs and to buy a home with two main types.
- Direct loan: These loans are issued directly by USDA from low and very low-income applicants and usually provide subsidies interest rates.
- Guaranteed loan: These loans are issued by an approved lender and supported by the USDA to help moderate-income borrowers qualify for mortgages without a down payment.
USDA also offers single-family home repair loans and grants to homeowners who need essential repairs, such as roof repairs or removing health damages (also known as the Section 504 Home Repair Program). The program allows eligible homeowners to receive loans up to $40,000 or financing up to $10,000.
How to choose a home renovation loan
There are so many options for financing your home renovation, how do you choose the right one? When considering your options, we provide an overview of how to get the best home renovation loan for your needs.
1. Check your credits
Before applying for a loan, be aware that your credit plays an important role in locking at the lowest interest rate. If you have time, consider taking steps to improve your score by paying off your credit card bill and making all payments on time.
2. Estimate the cost of the project
Is this a DIY job or does it require an expert? If so, what will your labor costs be? Do I need to rent a place to live elsewhere while the project is happening? A comprehensive budget summary. The size of that number will help you understand which loan is best. You can also estimate monthly payments.
3. Know how fair you currently have
If you are considering renovating an existing home, take a look at the monthly mortgage statement to understand how much stake you have acquired.
“If the borrower has the ability to withdraw money for a cash-out refinance or renovation via a home equity loan or a credit line, the cost of getting money for rehabilitation or renovation will be less.” “The problem with doing that is when you don’t have fairness in your home to withdraw that cash.
“Rehabilitation adds value to your home and if you don’t have much fairness in your home, a 203(k) loan or a Fanny May Homestyle renovation loan might be your only option,” says Becker.
4. Comparison Shop
Just look at the payment terms and rates from several different lenders, as you did with a mortgage. Fees and costs vary from bank to bank. So do some research (and mathematics) and see the best deal. Certainly, check out mortgage lenders ratings and reviews. The better thing to do than renovating your home is to renovate it while you know you’re getting a substantial deal with the funds you borrowed.
What to pay attention to when renovating a home?
Renovating your home may sound exciting, but remember that these projects have important drawbacks in borrowing money to make them a reality.
Make sure your upgrade doesn’t reach any of these drawbacks.
- Make an investment that is not worth the cost. Are you planning to sell this house in the near future? Don’t spend money on renovations to your home that doesn’t raise the selling price of your home as much or more.
- No extra costs are taken into consideration. When considering renovations, remember that total costs probably aren’t just labor and materials. Totals often include construction and engineering services, inspections and permit fees. Additionally, you should expect unexpected costs, overruns, and more to pop up.
- Being unrealistic about the timeline. Renovating a home is not an easy task. Consider the potential implications of delays in the project. If you are renovating your kitchen, that means more takeout and dining out. Both are more expensive than home cooking. If you are renovating your bedroom, you can rent more time while waiting for it to come back.
Home Renovation Loan FAQ
Additional Reports by Libby Wells
