A renovation loan is a type of loan that borrowers can use to make renovations to their current or future home. It could mean turning a fixer-upper into the home of your dreams. Renovation loans can be taken out at the time of purchase or as part of a refinance of your current home to make improvements. These renovations usually result in the homeowner’s ability to build equity immediately once the renovation is complete. There are many options to choose from when it comes to a renovation loan.
How do renovation loans work?
With a renovation loan, you can turn a fixer-upper into the home of your dreams. Renovation loans can be stand-alone loans or in tandem with a new home purchase or refinance depending on the type of loan you are approved for. Here are some highlights of common renovation loan types:
Construction to Perm Renovation Loan
If you’re looking to do major renovations, the 2-time close Construction to Perm (CP) renovation loan may be for you. You can put down as low as 10% and make interest-only payments during the construction.
Streamlined FHA 203k
With a single FHA home loan, you can combine the cost of the home with the non-structural renovation costs – up to $31,500 in renovations. A streamlined FHA 203k can be done as part of a purchase or refinance. Non-structural repairs include improvements/modernizations, elimination of health/safety standards, replace roofing, painting, and more.
Homestyle Renovation Loan
The Homestyle Renovation Loan makes it possible to include renovation costs with your conventional first mortgage on your home. This is a cost-effective way to make renovations to turn a house into the home of your dreams, and any kind of repairs are possible as long as they are permanently affixed to the property. Down payments are as low as 3%.
VA Renovation Loan
VA renovation loans with up to $35,000 in renovations are available to veterans and active service members. Borrowers may use the funds for minor structural repairs and other non-structural renovations to the property including the roof, HVAC systems, and built-in kitchen appliances. Loans up to 100% of the home’s value are allowed, and borrowers must have a credit score of at least 620 to qualify.
When should a renovation loan be used?
If you’re debating whether a renovation loan will be right for you, answer these questions. Are you considering renovations that will increase the value of your property? Do you prefer to not use your savings to make these improvements? Will the loan save you money long-term? If you answered “yes” you should consider a renovation loan. Every situation is different, so it’s best to make sure you research all of your renovation loan options.
Renovation Loan Alternatives
Home renovation loans are an affordable way to make improvements to your property, but there are other options. A few renovation loan alternatives are a home equity line of credit (HELOC), cash-out refinance, personal loans, or credit cards. A renovation loan may be a better option than a HELOC because HELOC loan rates fluctuate with the market. There is also the cash-out refinance option. A cash-out refinance involves refinancing your full mortgage with a higher loan amount to use the extra money for renovations. This may be a good option if you have a good credit history to access low interest rates and a decent amount of equity in your home. You can also consider low-interest credit cards or personal loans if you have a good credit history to qualify for low interest rates. However, industry experts suggest borrowers use every other option other than credit cards or personal loans to make renovations to their homes.
Talk to your local Loan Officer to learn about the various types of renovation loans and determine which one might be a good fit for you!