Renovation Loans
You’ve found an almost-perfect house to buy, or you love your current home and want to make some updates. Maybe you really want to live in a particular neighborhood, but the available homes are too small for your family. Now what? When you can’t find a house that ticks all the boxes, it’s time to renovate a house to do all that, and more.
What is a renovation loan?
A renovation loan allows you to customize a home you’re buying, or one you own now. While some renovation loans are for primary residences only, others can be used for second homes or investment properties. There are loans for projects large and small, and even loans specifically for Veterans and people living in rural areas.
Two big plusses: A renovation loan allows you to finance your improvements at an interest that’s lower than a credit card, and it preserves your cash reserves. If you want to renovate, we (probably!) have the loan for you.
How does a renovation loan work?
Traditional home loans pay a lump sum at closing to buy a property (purchase) or pay off a mortgage (refinance). Renovation loans include funding to pay for the renovations, so you only have one closing and one appraisal, saving time and money. You’ll need to choose a reputable contractor who meets Ignite Mortgage’s validation requirements (such as licensing and insurance) and provide a budget for your improvements. One important note: Renovation loans do not allow homeowner DIY participation.
Renovation loan types Options
There are several loan options for home renovations. Each one has limitations on the type of renovations you can make, and they may have specific spending limits. Take a look at these popular choices.
Conventional renovation loan
Fannie Mae and Freddie Mac both offer conventional renovation loans: Fannie Mae HomeStyle® and Freddie Mac CHOICERenovation®. With down payments as low as 3% of the total acquisition cost, the loans can be used to either purchase and renovate or refinance and renovate. There’s also a wider range of eligible projects than some other loans, and you can finance a second home or investment property.
FHA 203(k) loan
FHA 203(k) loans come in two versions, depending on the type of renovation and the amount you’ll be spending on your project. You can purchase and renovate or refinance and renovate with either loan. The Limited loan is for smaller, non-structural projects costing under $75,000. The Standard loan is for larger cosmetic projects or structural changes from $5,000 and up. One big advantage of an FHA loan is that your down payment can be as low as 3.5% of the total acquisition cost of the property.
USDA renovation loan
Is the home you want to renovate in an eligible rural area? Then a USDA renovation loan could be just right for you. And “rural” includes small towns and even some suburban areas. There are income requirements for these loans, they are for purchases only, and target single family properties without income producing features.
A major benefit is that you can get a loan with 0% down and borrow up to 100% of the home’s after-renovation value. There are two USDA renovation loans: Limited is for non-structural repairs up to $35,000, while Standard covers structural and non-structural repairs exceeding $35,000.
VA renovation loan
If you’re eligible for a VA loan, but want to purchase or refinance a home that needs renovations, consider a VA renovation loan. Like a regular VA loan, you can purchase a home with 0% down, but a VA renovation loan allows you to finance up to 100% of the after-improved value of the home (90% for a refinance). The two VA renovation loans are: VA Limited, for up to $75,000 in non-structural renovation costs, and VA Standard, for structural and non-structural costs exceeding $75,000.