Updated November 2024

In a hot housing market, homes are selling as fast as they hit the MLS. Real estate professionals will tell you to keep an open mind, and that you might have to compromise on your definition of your dream home. But as mortgage professionals, our best advice is to be informed about all your financing options. For example, a Renovation Loan, or Rehab loan, can make it easy to access the money needed to turn any home into your dream home, even if you're not interested in moving!

What is a Renovation Loan

This all-in-one mortgage loan includes the money for repairs and renovations, so you can start updates immediately. Whether it’s a foundation repair or a brand new kitchen, this loan can help you bring big plans to life quickly, rather than waiting years to save for upgrades.

A renovation loan is great for a fixer-upper!

Buying a fixer-upper may seem intimidating, but an FHA 203(k) Renovation Loan can simplify the process. With the financing secured upfront, you can start transforming the property without draining your savings or maxing out credit cards. This makes it easier to add modern touches and create a home you’ll love from day one.

Consider refinancing with renovation loan instead of moving!

If you’re not interested in moving, a renovation loan can still be beneficial for upgrading your current property. A refinance with a renovation loan can provide funds to make your home more functional, whether you want an open floor plan, an in-law suite, or storm-damage repairs.

Types of Home Renovation Loans

There are different types of this special mortgage loans designed for different levels of home renovations. Both FHA (government backed) and Conventional loans offer Renovation loans.

Standard renovation loans are for designed for whole-house renovations. These top-to-bottom projects offer higher funding limits and work with an elongated timeline. As part of the lending requirements, a full renovation will require that the borrower(s) work with a consultant to keep the project on track and within the guidelines of the loan and its terms.

But not every buyer is planning to renovate the entire house. Sometimes it's just a new kitchen and bathroom. For partial-house renovations, there is the streamline renovation loan.

Streamline Renovation loans are designed for less expensive renovations with shorter timelines, so the lending process is less simpler. And for the borrower, that means easier access to the funds for renovation without the need to involve the consultant.

Key Benefits of a Renovation Loan:

• Instant Financing for Projects: The loan covers the cost of repairs and renovations upfront on an existing property, allowing homeowners to complete improvements within weeks or months rather than years.
• Flexibility to Live Elsewhere During Renovations: For ful house-renovations, the renovation loan can include financing for up to six months of alternate housing costs, so you don’t need to live in a construction zone. This does not apply to streamline renovation loans.

FHA Just Increased the Allowable Funds

FHA just increased the allowable fund limit on their streamlined renovation loan from $35k to $75k, which is huge news for home buyers as well as home owners who'd like to pay for home improvements with a refinance.

FHA 203(k) Renovation Loan Basics

As with any mortgage loan, certain requirements must be met:

• Minimum Renovation Cost: $5,000 minimum for renovation costs.
• Use of a 203(k) Consultant: For a standard renovation loan (whole house renovations) a 203(k) Consultant is required to estimate repair costs and oversee the project. This does not apply to Streamlined Renovation loans.
• General Contractor: Only one general contractor is permitted for the work.
• Work Schedule: Renovations must begin within 30 days of the agreement and be completed within 12 months.
• Property Types: The loan applies to 1-4 unit homes, approved condos, and manufactured homes and the buyer/owner must live on the property as their primary residence.
• 580 minimum credit score
• Projects must only include allowable improvements

How Does the FHA Renovation Loan Process Work?

Here’s a typical timeline for an FHA 203(k) Renovation Loan:

1. Find the Property and Select a Contractor: Choose a licensed general contractor to handle renovations.
2. Get a Renovation Bid: The contractor provides a detailed bid, which the lender uses to determine total financing.
3. Loan Approval: The loan covers the purchase price and renovation costs, creating instant equity based on the home’s estimated “after renovation” value.
4. Finalization and Funds: At settlement, funds are released to the contractor, and renovations begin right away, allowing you to move into a home that meets your needs from day one.

Conventional Renovation Loans

But of the recent increase in the streamline funds, this article focuses on FHA renovation loans but there are conventional renovation loans available including HomeStyle which has a first time buyer option with as little as 3% down.

Explore Your Options with BMC Keystone Home Mortgage

At BMC Keystone, we specialize in renovation loans and are here to guide you through every step.  Whether you’re buying or refinancing, we’ll help you understand how to use a renovation loan to its fullest potential and make your ideal home a reality.