Renovation Loans

A renovation loan combines the purchase (or refinance) of a home with the cost of repairs or improvements into a single mortgage.

Renovation financing can help when a home needs repairs that prevent standard financing, or when you want to finance eligible improvements. Cosmetic age alone does not make a home ineligible.

Available renovation financing can include FHA 203(k), HomeStyle Renovation, CHOICERenovation and VA renovation programs, subject to current lender and program requirements. Project eligibility and lender requirements apply.

A renovation mortgage can make sense when the property itself works but the condition does not, and the borrower would rather finance the purchase or refinance and the improvements together instead of paying for the work entirely out of pocket after closing.

The important question is not simply how much work the property needs. Different renovation programs have different rules for the type of work, property and occupancy, renovation budget, contractor requirements, completion timeline and amount that can be financed.

These loans also rely heavily on the property’s projected as-completed value. The appraiser evaluates what the home should be worth after the approved renovation is finished, and that value can affect how much financing is available.

The tradeoff is more project administration than a normal mortgage. Plans, contractor bids, budgets, escrowed renovation funds, inspections, draws, change orders and completion documentation can all become part of the transaction.

The Limited 203(k) is intended for less extensive, non-structural renovation work. There is no minimum repair amount, and the current maximum total rehabilitation cost is $75,000. An FHA-approved 203(k) Consultant is optional rather than required.

It can cover remodeling, replacement of building components, energy improvements, appliances and other eligible repairs, but it is not simply a $75,000 version of the Standard program.

FHA treats a project as too extensive for Limited 203(k) when applicable duration, draw or occupancy limits are exceeded, or when required repairs arising from the appraisal need a Consultant’s specification of repairs/Work Write-Up or plans or architectural exhibits.

Under the current draw rules, a lender can approve as many as four draw requests per contractor, consisting of an initial draw, up to two intermediate draws and the final draw. For repair costs above $15,000, FHA requires an inspection to confirm satisfactory completion.

The dividing line is therefore not just the dollar amount. Scope, complexity, duration and how the work has to be managed determine whether Limited 203(k) is appropriate.

The Standard 203(k) is designed for larger or more complex rehabilitation, including projects involving structural work or major remodeling. It requires at least $5,000 of rehabilitation work and requires an FHA-approved 203(k) Consultant.

Unlike Limited 203(k), FHA does not impose a separate maximum dollar amount on the rehabilitation budget, although the total mortgage still has to fit within the applicable FHA mortgage-limit and program calculations.

The Consultant evaluates the project, prepares the Work Write-Up and cost estimate, develops or coordinates required exhibits, and helps document progress as the work is completed.

Standard 203(k) permits a longer rehabilitation period than Limited 203(k), and under applicable rules can also finance mortgage-payment reserves when the property cannot be occupied during renovation.

Under the current draw rules, Standard 203(k) permits up to five draw requests, consisting of up to four intermediate draws plus the final draw, with multiple disbursements permitted within a draw where allowed.

Standard 203(k) is therefore more than simply “the version for repairs over $75,000.” It is the FHA renovation structure designed for larger, structural or administratively more complex projects.

Fannie Mae’s HomeStyle Renovation mortgage can combine conventional financing with renovation costs on a purchase or limited cash-out refinance.

Eligible properties can include one- to four-unit primary residences, one-unit second homes, one-unit investment properties, manufactured homes, and eligible PUD, condo and co-op units, subject to the program’s specific restrictions.

For a purchase, renovation costs generally cannot exceed 75% of the lesser of the purchase price plus renovation costs or the property’s as-completed value. For a refinance, renovation costs generally cannot exceed 75% of the as-completed value. Manufactured homes have a separate renovation-cost limit. The mortgage itself must also remain within Fannie Mae’s applicable loan and LTV limits.

HomeStyle also has a limited DIY option. On an eligible one-unit property other than a manufactured home, borrower-performed work cannot exceed 10% of the as-completed value, the lender must approve the work in advance, and the borrower cannot finance or be reimbursed for the value of their own labor. The budget still has to include enough labor cost for a contractor to finish the job if necessary.

If a principal residence cannot be occupied during renovation, eligible renovation costs can also include a limited number of monthly housing payments under the applicable requirements.

HomeStyle can allow eligible luxury improvements, including new pools. FHA 203(k) excludes new luxury additions but may allow repairs to an existing pool.

CHOICERenovation is Freddie Mac’s renovation mortgage program, with its own eligibility and administration rules rather than simply being interchangeable with HomeStyle.

The regular CHOICERenovation program can be used for a purchase or no-cash-out refinance, including eligible manufactured homes. The renovation financing and permanent mortgage are structured as a single closing, and the improvements are completed after the mortgage closes.

Freddie Mac also offers CHOICEReno eXPress, a streamlined variation intended for smaller renovation projects.

Regular CHOICERenovation allows 450 days after the Note Date to complete renovations, while CHOICEReno eXPress allows 180 days. Their administration requirements also differ. Extensions can be available when circumstances outside the borrower’s or contractor’s control delay the work.

The appraisal is based on the property’s as-completed condition, using the plans, specifications and cost estimates for the renovation.

CHOICERenovation can also permit an accessory dwelling unit to be added or renovated, subject to the rest of the program requirements.

VA permits financing for alterations and repairs in connection with the purchase of a home or on an eligible residence the Veteran already owns and occupies, subject to VA requirements and participating-lender availability.

The cost of approved improvements can be incorporated into the financing to the extent the completed property value and applicable VA requirements support the mortgage.

When work remains after closing, the participating lender’s renovation program determines how repair funds are held and released, including any escrow, draw and inspection requirements.

The finished property must satisfy VA’s applicable Minimum Property Requirements, and completion must be documented before the renovation process is closed out.

Changes to the approved work can require additional documentation, valuation support or borrower funds rather than automatically increasing the VA-guaranteed mortgage.

A practical limitation is lender availability. VA may permit alteration-and-repair financing under its guaranty rules, but not every VA lender offers or operationally supports a renovation product. The participating lender’s program determines the detailed contractor, draw, administration and product requirements within the VA framework.

1. You and your contractor agree on a scope of work and bid.
2. The lender orders an appraisal based on the plans/specs, valuing the home as if the work were complete.
3. At closing, the renovation funds go into an escrow holdback.
4. Renovation funds are released under the program’s draw and completion rules. Inspection requirements and the number of draws vary.
5. Your mortgage payments follow the loan terms. Approved renovation costs are paid from the escrow, but down payment, unfunded costs and overruns may still require your own funds.