Renovation Loans: Finance a Home Purchase and Renovation in One Loan

What Are Renovation Loans?

A renovation loan combines the purchase price of a home with the estimated cost of renovations into a single mortgage. Instead of taking out a separate home improvement loan or construction loan after closing, you finance everything together from the start.

Two primary renovation loan programs are available:

• FHA 203K (Standard and Limited): Government-backed, more flexible credit requirements, two versions based on scope of work
• Fannie Mae HomeStyle: Conventional program, broader property eligibility, may allow higher loan amounts

FHA 203K Loan

The FHA 203K program comes in two versions:

Standard 203K: For major renovations including structural work, room additions, and foundation repairs. Requires a HUD-approved 203K consultant. Minimum repair amount applies.

Limited 203K (Streamline): For non-structural repairs up to $35,000. Simpler process, no HUD consultant required for most projects.

Both versions require a licensed contractor. Work begins after closing, and funds are disbursed in draws as work is completed. The lender holds the renovation funds in escrow.

Fannie Mae HomeStyle Loan

The HomeStyle renovation loan is a conventional product available for primary residences, second homes, and investment properties. Key differences from FHA 203K:

• Conventional program, so credit requirements are typically higher
• Mortgage insurance is cancellable when equity exceeds 20%
• Can be used for second homes and investment properties (FHA 203K is primary residence only)
• Renovation budget up to 75% of the “as-completed” appraised value

How the Process Works

1. Find a property and estimate renovation costs with a licensed contractor
2. Loan is underwritten based on the “as-completed” appraised value
3. Close on the home
4. Renovation work begins; funds are disbursed in draws as work is completed
5. Inspections verify work before each draw is released

Who Renovation Loans May Fit

Renovation loans may be worth exploring if you:

• Are interested in buying a fixer-upper and want to roll renovation costs into one loan
• Are purchasing a property that needs work to meet standard loan requirements
• Want to customize a home to your specifications after purchase
• Are interested in a property in a desirable location but the home needs updating

Benefits

• Single loan and single closing for purchase and renovation
• Borrow based on the home’s after-improvement value
• Can finance repairs that would disqualify a property from standard financing
• Available in markets where Louisiana, Michigan, or other areas have older housing stock

Limitations

• More complex process than a standard purchase loan
• Requires working with licensed contractors
• Renovation funds held in escrow and released in draws
• FHA 203K Standard requires a HUD-approved consultant
• Longer timeline than a standard purchase
• Primary residence only for FHA 203K