How Do Renovation Loans Work

Renovation loans, or renovation mortgages, can be a great way for home buyers to find a house and turn it into their dream home.  It can also be a great way for home owners to stay in a home they love while making the updates that they want or need.  Renovation loans can be used for a wide variety of home projects, from room or ADU additions, to landscaping, to energy efficient upgrades.   In today’s mortgage landscape, there are a lot of options, and results are best with advance knowledge and proper planning.

 

The Budget and the Plan

In order to get a renovation loan, you need to have a pretty good idea of the scope of your home project.  The cost and timeline are 2 things to be aware of, and when applying, it helps if contractors are already lined up with budgets and the cost breakdown for materials and labor (for most renovation loans, you’ll need contractors familiar with the draw schedules of renovation loans) as well.  Once you know the scope of your project, how much the work will cost, and who will complete it, you’ll be able to move forward with an application for the proper type of renovation loan.

 

Conventional or FHA?

Both conventional and FHA loan programs offer renovation loan options as part of their product suite.  Conventional has limited offerings, and FHA renovation loan offerings vary based on the scope of the project.  Generally speaking, minor projects with no major changes to an existing structure can be covered under an FHA 203k (streamline) loan, and FHA offers financing as well for energy efficient home upgrades through the EEM program.  For more complex, expensive, or structural projects, the full 203k is offered by FHA, and conventional offers the FannieMae Homestyle Renovation options.

 

These projects generally function in a similar fashion to each other, with a property value being considered after the completion of the noted renovations.  An appraiser will determine what the property of a home will be after renovations are done, and the financing is then based on that as completed valuation.  This allows a lender to finance most (and many times, all) of the costs of renovations without exceeding the value of a home.

 

While renovation loans aren’t necessarily difficult to process, it makes sense to work with a loan officer that’s familiar with the products being offered because there are certain forms, documents a contractor needs to complete, and some steps along the way that differ from more traditional financing.  Another consideration in recent years has been difficulties with supply chains and availability of workers – renovation loans require work to be completed within a certain period of time (usually within 6 months of closing) so it’s important to have professionals in place that can and will deliver on their promises and budgets.

 

Factoring in the above information, renovation loans can be a great way to turn a home with “great bones” into a dream home, or take a property that may be priced well but is “dated”, and update it to match the latest trends, creature comforts, and money saving efficiency upgrades.  From square footage additions to bath and kitchen remodels, depending on the type of renovation loan, there’s a lot that can be done (and financed!) with these product offerings.