Residential Magazine

Find the Right Fit with Renovation Loans

Borrowers need to understand their financing options when repairing or rebuilding a home

By Ryan Kelley

When homeowners aren’t able to pay for repairs or improvements to their homes, they need an alternative source of funding. This is when renovation loans come into play. Renovation loans come in a variety of styles, but all of them are designed to fund a home renovation with different levels of interest and payments.

Potential clients will likely be unfamiliar with the many options available to them to fix up an older home or make their newer home perfect. Mortgage originators should be able to walk their borrowers through these choices.

Fannie Mae option

The HomeStyle Renovation Mortgage is a Fannie Mae program that a borrower can get through any lender that is approved by Fannie Mae, but the borrower has to qualify. The loan requires the client to have a credit score of at least 620, make a 3% downpayment on purchase transactions and have a certified contractor create a cost estimate along with the details of the work that will be done on the home.

If a borrower has a lot of equity built up, like many current homeowners, they can get a low interest rate with a cash-out refinance.

This loan allows for the borrower to either buy a home for renovation or refinance their current home for improvements. The money for the improvements then goes into an escrow account and the contractor is paid directly from it, unlike a home equity line of credit, commonly known as a HELOC, or a cash-out refi- nance. The borrower never has access to the funds, which are strictly for the renovation.

For clients who are renovating their current home, a big advantage of this program is that they are only taking out one loan — it’s not a second mortgage, just a refinancing of the current loan. Homeowners are trading the flexibility of having the money available with the cost certainty of having the money paid directly to the contractor.

In terms of the numbers, the HomeStyle mortgage can provide up to 75% of the home’s price plus the costs of your renovation. It also can be calculated using the appraised value after the completion of the project. The funds can be used on any home- improvement or renovation project that the borro- wer wants. It also can be used in a real estate deal in which repairs need to be made as part of the contract, making it a great fit for homes that need a new roof or have a cracked foundation.

FHA option

Another option is the 203(k) mortgage through the Federal Housing Administration (FHA). These loans come in two flavors — limited (formerly known as streamline) and standard. The limited FHA 203(k) loan is for cosmetic repairs and has a hard cap of $35,000. Borrowers can use this rehab loan for a variety of repairs or improvements, such as a new basement, a paint job or an additional bedroom.

Homeowners can use a standard FHA 203(k) mortgage for larger projects. They can borrow a lotmore money, but there’s a catch: They have to have a qualified 203(k) consultant who will make sure that every step of the work is completed properly, from start to finish. Borrowers can use this loan for any home-renovation project of at least $5,000, provided that the home is at least a year old.

Many borrowers love this option because it gives them a safety net. Since many of the homeowners who will embark on a major construction project will hire a contractor anyway, this is a great system because it lets them hire a certified consultant who works as the project manager. The consultant helps the homeowner stay on budget and on schedule.

Homeowners can use the funds from this type of loan for a variety of projects, from small fixes to fully reconstructing the home (as long as you’re not pouring a new foundation). It’s an option that gives borrowers great rates, even if their credit isn’t perfect.

Equity advantage

A cash-out refinance is a third way to go for a home- renovation project. It’s a refinance of the current mortgage that lets the borrower take out a larger loan than before and keep the difference in cash. This gives them a lot more control over their funds and how they are utilized, but without the safety net of a consultant or a certified contractor.

If a borrower has a lot of equity built up, like many current homeowners, they can get a low interest rate with a cash-out refinance. Since they’re also improving the value of the home with a renovation while borrowing the money, a cash-out refinance can be a huge value proposition for borrowers. This loan will give the borrower lower rates than a personal loan, but it will likely require them to extend the length of their mortgage further into the future.

In a similar vein, borrowers can take out a HELOC. These are commonly referred to as a second mortgage. This type of loan can manage a changing balance and is great for borrowers who will have a lot of payments to make over the course of the project. It makes a great alternative for borrowers who need a large, long-term renovation, rather than a smaller project such as a single room or a pool. Since the borrower is using the home as collateral for a second loan to accompany the existing mortgage, HELOCs can be riskier than the HomeStyle, FHA 203(k) and cash-out refinance options.

VA opportunity

The U.S. Department of Veterans Affairs (VA) is now offering its own renovation loan program. This is an excellent way to get home-renovation financing with no money down. It’s limited to veterans, active-duty military personnel and their families.

These mortgages come with incredibly low rates and will save money for eligible borrowers compared to conventional loans or other credit options, such as credit cards or personal loans. Veterans can use this loan to renovate their home without having to go deep into high-interest debt or eliminating years of savings.

These VA loans have many strong features. Borrowers can take out loans of anywhere from 10 to 30 years with a fixed rate. These loans can be used to purchase or refinance the home, meaning that they can be used in a purchase scenario to help complete the sale, in the case of a shaky inspection. They also don’t require any sort of renovation consultant, like the FHA 203(k) standard or HomeStyle loans. If the borrower qualifies, this is going to be their best option in most cases.

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There are many ways for lenders and originators to help homeowners with home-renovation projects. These loans offer them ways to access the money that they need to either repair the home or turn it into the one they’ve always wanted.


  • Ryan Kelley

    Ryan Kelley is the founder of The Home Loan Expert LLC. In less than a decade, Kelley has gone from selling mortgages door to door to his neighbors to running one of the fastest-growing mortgage banks in America. Kelley rose to prominence with hard work and dedication, along with pioneering new techniques to get mortgages closed faster than anyone else in the business. With the addition of Hero.Loan, the rapidly expanding Veterans Affairs loan product, his company is growing every day.

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