Construction
Renovation Loans: Buy or Refinance and Fix the Home in One Loan
Short answer
A renovation loan combines the cost of a home and the cost of repairs or improvements in one mortgage. The loan is based on what the home will be worth when the work is done, and the repair money is held and paid to the contractor as work is completed. It takes more planning than a standard purchase.
Chris Lamm, NMLS# 209221Published Last reviewed
What a renovation loan is
One loan covers the purchase price, or the payoff of your current mortgage, plus the cost of the work. The appraiser estimates the value of the home after the improvements, and the loan is based on that figure. The repair funds sit in an escrow account and are released to the contractor as the work is inspected.
- FHA 203(k). A Limited version for smaller projects and a Standard version for larger or structural work.
- Conventional renovation loans. Fannie Mae HomeStyle and Freddie Mac CHOICERenovation.
- VA renovation options for veterans, where available.
Who it tends to fit
- Buyers of a home that needs work and may not pass a standard appraisal as it sits
- Buyers who want to update a home right away without a second loan
- Owners who want to remodel and refinance in one step
It is a poor fit for a rushed purchase. If you are building from the ground up, see the construction loan guide instead.
What to gather
- The property address or purchase contract
- A written contractor bid with the scope of work, the cost and a timeline
- The contractor's license and insurance information
- Your last 30 days of pay stubs and two years of W-2s, or tax returns if you are self-employed
- Two months of bank statements, every page
- Plans or permits, for larger projects
Common snags
- Vague or late bids. The lender and appraiser need a detailed written bid before the loan can move.
- The contractor review. Lenders review the contractor. Choose one who is licensed, insured and willing to be paid in stages.
- A longer timeline. These loans take longer than a standard purchase. Ask your agent to write the offer with that in mind.
- The contingency reserve. Most programs add a cushion on top of the bid for surprises. It is part of the loan.
- Doing the work yourself. Most programs expect licensed contractors. Ask before you plan on your own labor.
Your next step
Bring the address and a rough list of the work you have in mind. A first call can sort out which renovation loan fits and what the contractor needs to provide.
When you want to talk it through, book a short phone call with Zak on Chris Lamm’s team at MortgageOne. No credit check is needed for a first call, and you can bring as many questions as you like.
General education, not a loan offer or a commitment to lend. To talk through your own situation, book a short phone call at reddinglender.com/schedule or call (530) 282-1166.
Private lender. Not affiliated with or endorsed by the U.S. Department of Veterans Affairs or any government agency.
Common questions
Is a renovation loan the same as a construction loan?
No. A construction loan builds a new home from the ground up. A renovation loan repairs or improves a home that already exists.
Can I do the work myself?
Usually not. Most renovation loans expect licensed contractors, and the lender reviews the contractor before closing. Ask before planning on your own labor.
What kind of work can be financed?
Most programs cover repairs and improvements that stay with the home, such as roofs, kitchens, baths, flooring and systems. Larger programs can include structural work. Each program has its own list.
Written by Chris Lamm
Senior Loan Advisor and Branch Manager, MortgageOne Inc. NMLS# 209221. 25 years in mortgage lending.
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