Program Summary: A renovation loan, FHA or conventional, can make it easy to access the money needed to turn your new home into your dream home, or if you're not interested in moving, do a rehab refinance.
Home Renovation Loans
FHA or Conventional. Purchase or Refinance. Loads of Possibilities!
Updated November 2024
In today’s competitive housing market, homes are selling as soon as they hit the MLS. Real estate professionals often say to “keep an open mind,” and that’s true, but from a mortgage perspective, being informed is just as important. One powerful option many buyers overlook is the Home Renovation Loan, sometimes called a Rehab Loan. This flexible mortgage program can make it easy to access the funds needed to transform any property into your dream home.
What is a Home Renovation Loan
A renovation loan is an all-in-one mortgage that finances both the purchase (or refinance) of a home and the cost of repairs or upgrades. Whether you need a foundation repair, a roof replacement, or a full kitchen remodel, this type of financing lets you start improvements right away instead of waiting years to save for them.
A renovation loan is great for a fixer-upper!
Buying a fixer-upper can be intimidating, but an FHA 203(k) Renovation Loan simplifies the process. With financing secured upfront, you can immediately begin transforming your new home without draining your savings or using high-interest credit cards. This is a popular choice for buyers who want to personalize an older property with modern features and finishes.
Refinance With a Renovation Loan Instead of Moving
If you love your neighborhood but your home no longer fits your lifestyle, a renovation refinance could be the perfect solution. A refinance with a renovation loan allows you to tap into your home’s equity to fund upgrades, whether that’s a new floor plan, an in-law suite, or storm-damage repairs.
Types of Home Renovation Loans
here are two primary types of renovation loans, available through both FHA (government-backed) and Conventional mortgage programs.
Standard Renovation Loan
Designed for full-scale or whole-house renovations, these loans offer higher funding limits and longer project timelines. Borrowers are required to work with a HUD 203(k) Consultant to estimate costs and ensure the project meets all lending guidelines.
Streamline Renovation Loan
Perfect for smaller projects like a kitchen or bathroom remodel. Streamline renovation loans have a lower cap on renovation costs, shorter timelines, and do not require a consultant making them simpler and faster to process.
Key Benefits of a Renovation Loan:
- Instant financing for projects: Renovation costs are built into the loan, so improvements can begin immediately after closing.
- Live elsewhere during renovations: For full-house projects, the loan can include up to six months of alternate housing expenses. (This feature does not apply to streamline loans.)
- One mortgage, one payment: Combines your purchase or refinance and renovation costs into a single, manageable loan.
- Potential for instant equity: Your financing is based on the home’s after-renovation value, which often boosts overall equity.
FHA Just Increased the Allowable Funds
Big news for homebuyers and homeowners, the FHA has increased the allowable limit on streamlined renovation loans from $35,000 to $75,000. This expansion gives borrowers far more flexibility to tackle meaningful improvements without needing to move into a full 203(k) Standard program.
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:
- Find the Property and Select a Contractor: Choose a licensed general contractor to handle renovations.
- Get a Renovation Bid: The lender uses the contractor's detailed bid to determine the total loan amount.
- Loan Approval and Appraisal: The loan covers the purchase price and renovation costs, creating instant equity based on the home’s estimated “after renovation” value.
- Closing and Fund Release: 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
In addition to FHA renovation loans, there are Conventional options such as Fannie Mae’s HomeStyle Renovation Loan. These loans can be used for purchase or refinance and may be available with as little as 3% down for qualified first-time buyers. Conventional renovation loans can be a great fit for borrowers with higher credit scores who want more flexibility in project types and property eligibility.
Explore Your Options with BMC Keystone Home Mortgage
At BMC Keystone Home Mortgage, we specialize in renovation loans and help borrowers throughout Pennsylvania find the right solution for their needs. Whether you’re buying a fixer-upper or upgrading your current home, our team can guide you through every step—from contractor bids to final approval—so you can make your ideal home a reality.
Request a consultation with our Glenside office to learn more about renovation loan programs, eligibility, and today’s best rates.