How to Get a Home Loan With Renovation Costs Included

New homes can be expensive, with the median property selling for $437,300, according to the U.S. Census Bureau. However, if you’re looking to finance an existing home that needs some repairs, there are several loan options that allow you to borrow funds for the home as well as extra for repairs. Buying a fixer-upper with a home renovation mortgage could help you finance the cost of your home purchase and upgrades into a single loan. Here’s how common renovation loans work, their requirements, and what to consider before you apply. 

What is a home loan with renovation financing?

A home loan with renovation financing combines the purchase price of a home that needs some TLC with the cost of repairs into one loan. A home renovation loan factors in the after-improvement appraisal value of the property, and you’ll often get a lower interest rate than you’d receive on a personal loan, credit card, home equity loan, or home equity line of credit (HELOC).

“If you're in an area where there's not a lot of inventory, the way to get access to more inventory is to consider renovation financing, because that'll allow you to pick out some properties that need more work,” said Edwin Santiago, a Pennsylvania-based branch manager with Fairway Independent Mortgage. 

He added that homebuyers can usually get a good deal on fixer-uppers because they require extensive work that many buyers don’t want to deal with.

How a home renovation loan works

Typically with a fixer-upper mortgage, you’ll identify a home to purchase, choose a contractor, and submit renovation plans to your lender. Your lender, in most cases, will order an appraisal to determine the property’s value once all repairs and updates are complete to calculate how much to lend you. 

For many government-backed loans, a housing consultant approved by the U.S. Department of Housing and Urban Development (HUD) will oversee the project and review the contractor plans to ensure they meet borrowing guidelines.

Once you close on the loan, funds are either disbursed immediately or placed into a custodial account from which the lender makes regular payments to the contractor throughout the renovation process. You’ll have a final inspection after renovations are done. Once the project is finished, the lender closes the custodial account and puts any outstanding funds toward your unpaid principal loan amount.
 

“This is where a HUD consultant is very valuable, because a HUD consultant is usually a home inspector, plus they have the experience and expertise in construction, so they can walk through the house with you and determine what needs to be done [...] to make it compliant for financing,” Nunn said. 

Types of home renovation loans

Not all lenders offer home renovation mortgages, so it’s critical to shop around and ask lenders if they have experience with these loans, Nunn recommended.

“There's a lot of moving parts to a renovation loan, and there's a lot of things that can go wrong,” Nunn pointed out. “And if you're working with somebody that hasn't been down this path many times, they're not going to get [the loan] closed on time and as agreed.”

Purchase or refinance borrowers can choose between conventional mortgages or government-backed loans. Types of home renovation loans include: FHA 203(k) rehabilitation loan program, VA renovation loan, USDA renovation loan, Fannie Mae’s HomeStyle renovation program, and Freddie Mac’s CHOICERenovation loan.

FHA 203(k) loan for home renovation

The FHA 203(k) rehabilitation mortgage, backed by the Federal Housing Administration (FHA), must improve a home’s livability, safety, and use. There are two 203(k) loan types: Limited and Standard. FHA 203(k) Limited loans allow you to finance up to $75,000 in renovation costs, and are geared toward more minor, non-structural repairs and improvements. 

For major renovation projects of $5,000 or more, the FHA 203(k) Standard loan is the way to go. It has no limit on renovation costs as long as the total value of the property is within the area’s FHA loan limits. 

The FHA has strict requirements on what kinds of improvements borrowers can make and eligible property types. While it’s optional for the Limited program, FHA 203(k) Standard loans require oversight from an FHA-approved 203(k) consultant involved to inspect improvements and ensure the property meets FHA requirements.

Here are some key borrowing requirements for the FHA 203(k) loan for home renovation:

• Minimum credit score: 580 (with 3.5% down); 500 (with 10% down)
• Minimum down payment: 3.5% (with credit scores of 580 or higher); 10% (with credit scores of 500-579)
• Debt-to-income ratio: 43% preferred but can go up to 50%.
• Loan limits: Yes, must be within FHA loan limits for the local area.
• Occupancy: Primary residences of one to four units.
• Timeline: Renovations must be completed within 12 months of the closing date for Standard and within nine months for Limited.

VA renovation loan

The VA renovation loan is guaranteed by the Department of Veterans Affairs (VA). VA loans are available to borrowers who are active-duty service members, veterans, or eligible surviving spouses. VA borrowers must have a current certificate of eligibility to qualify for financing. 

The total amount you can finance with a VA rehab loan depends on the “as-completed” value of the home after all renovations are done. This value is the lesser of the total purchase cost or the projected market value following renovations (which is based on a VA appraisal and is required on all VA loans).

To qualify for the VA renovation loan, you must meet the following guidelines:

• Minimum credit score: VA doesn’t set a minimum, but VA lenders typically require a credit score of 620 or higher.
• Minimum down payment: 0%
• Debt-to-income ratio: 41%
• Loan limits: None; VA borrowers with full entitlement do not have loan limits.
• Occupancy: Primary residence of one to four units.
• Timeline: Construction must be completed within 120 days of your closing date.

USDA renovation loan

Loans guaranteed by the U.S. Department of Agriculture (USDA) are meant for low- to moderate-income borrowers purchasing a home in a USDA-eligible rural or suburban area. 

Like the FHA’s 203(k) programs, USDA loans come in two types for fixer-uppers: Limited and Full. As the name implies, the USDA Limited renovation loan is meant for smaller repairs and remodeling projects, up to $35,000.

Full USDA renovation loans have no minimum or maximum renovation amounts, but borrowers have to meet the USDA’s income limits.

Borrowing requirements for USDA renovation loans include:

• Minimum credit score: 640
• Minimum down payment: 0% 
• Debt-to-income ratio: 41%
• Loan limits: While there are no loan limits, the USDA restricts its loans to borrowers who earn less than 115% of an area’s median income.
• Occupancy: Single-family primary residence
• Timeline: Six months

Fannie Mae HomeStyle renovation loan

Fannie Mae is one of two government-sponsored enterprises that buys and sells most mortgages in the U.S. Fannie Mae sets guidelines for a variety of conventional loan programs, including its popular HomeStyle renovation loan.

Unlike other rehab mortgages, you can use HomeStyle funds for luxury upgrades like pools and landscaping, and there are no restrictions on the types of renovations you can do or a project minimum. Plus, unlike government-backed renovation mortgages, you can use a HomeStyle renovation loan on investment properties. 

However, you’ll need a higher credit score to qualify for the HomeStyle loan.

Eligibility guidelines for the HomeStyle renovation loan include:

• Minimum credit score: 620
• Minimum down payment: 3%-5% depending on what specific loan you pair it with. 
• Debt-to-income ratio: Varies by lender; some may allow up to 45%
• Loan limits: For purchase transactions, the total loan amount cannot exceed the lesser of 75% of either the purchase price plus renovation costs or the as-completed appraised value. Manufactured homes are limited to the lesser of $50,000 or 50% of the as-completed appraised value.
• Occupancy: Primary residences of one to four units.
• Timeline: 15 months

Freddie Mac CHOICERenovation loan

Freddie Mac offers the CHOICERenovation mortgage. Like Fannie Mae’s product, borrowers can use this renovation loan to make improvements on investment and vacation properties, which isn’t allowed on government-backed loans.

Additionally, Freddie Mac offers the CHOICEReno eXPress mortgage for smaller projects (similar to the FHA Limited renovation loans). With this option, renovations must be completed within 180 days of closing. Renovation costs can be up to 10% of the purchase price in most areas and up to 15% for homes in designated high-need areas, according to Freddie Mac.

Here are some key borrowing requirements for the CHOICERenovation loan:

• Minimum credit score: 620
• Minimum down payment: 3% to 5% depending on the specific loan you pair it with. 
• Debt-to-income ratio: Varies by lender
• Loan limits: For purchase transactions, the total loan amount cannot exceed the lesser of 75% of either the purchase price plus renovation costs or the as-completed appraised value. Manufactured homes are limited to the lesser of $50,000 or 50% of the as-completed appraised value.
• Occupancy: Primary residences of one to four units, second homes, and single-unit investment properties.
• Timeline: Renovations must be completed within 450 days of the closing date for CHOICERenovation loans; 180 days for CHOICEReno eXPress mortgages.

Pros and cons of renovation mortgages

When you use a single home loan to buy a fixer-upper and roll in the cost of improvements, there are advantages and disadvantages to consider:

Home loan with renovation FAQ