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Nov 2017

Financing Options for Your Fixer Upper

So, you found a house that checks off all the items on your home wishlist — an open floor plan, new hardwood floors, a backyard for your dog, a good school district — but it’s in need of some major renovations. A renovation loan could be the right option for you to turn an almost-perfect house into your dream home.

What is a renovation loan?

A renovation loan is a home loan that also allows you to make updates and repairs to your home. There are several renovation loan options for different types of borrowers, for buying a new home or for refinancing. An appraiser will determine what the home will be worth after all renovations are complete, and this is what a lender uses to determine your loan amount. For example, if you’re buying a home that is $150,000, and your kitchen renovations are expected to increase your property’s value by $20,000, your renovation loan will be for $170,000.

Renovation loan options

There are a few different renovation loan options: a Conventional Renovation loan, FHA 203(K) loan, or VA Renovation loan. These options allow borrowers who qualify to rebuild their home or purchase a new home while factoring in the costs of repairs and remodeling.

Conventional renovation loan

A Conventional Renovation loan lets you purchase a home and factor in the costs of repairs and remodeling. It’s pretty simple: both your home loan and your renovation costs are rolled into one loan. That way, you only have one loan with one monthly mortgage payment. The funds that will pay for the renovations are held in an escrow account until you use them, which is just a separate account that your lender sets up to pay certain expenses (you also have escrow accounts for your insurance and taxes). Options for Conventional Renovation loans start at $5,000 and extend to the maximum loan limits in your area. This option is a great way for you to get into your new home and make updates and repairs without having to spend thousands of dollars in out-of-pocket renovation costs upfront.


An FHA Loan is a loan backed by the Federal Housing Administration. This loan is a popular option, especially among first-time homebuyers, and features a low 3.5% down payment. An FHA 203(K) loan gives you the benefits of an FHA loan, while also allowing you to finance home renovations and repairs. Like the Conventional Renovation loan, an 203(K) loan rolls your mortgage payment and renovation costs into one monthly mortgage payment. A limited 203(K) loan covers repairs and renovations that range from $5,000 to $35,000, while a standard 203(K) loan is for renovations over $35,000.

VA renovation loan

A is guaranteed by the Department of Veterans Affairs and offers favorable loan terms to active duty and retired service members. Similar to the other renovation loan options, a VA Renovation loan allows you to bundle renovation costs into your VA home loan — with one loan application, one loan, and one monthly mortgage payment. You still get all the benefits of a traditional VA loan, including no down payment options, no private mortgage insurance, and reduced closing costs, but you avoid having to get a second loan to finance your renovations.

Refinancing with a renovation loan

Maybe you moved into your home years ago with intentions of making changes and updates, but never got around to it. Refinancing with a renovation loan may get you the home updates you’ve always wanted. If you have reached 20% equity in your home, you may be eligible to refinance your home loan with a renovation loan. This allows you to wrap your renovation costs into a new mortgage loan to make changes to your house without spending thousand of dollars out-of-pocket. A renovation loan could be just what you need when you’ve found the perfect fixer-upper, or if you want to make changes to your current home. Talk to your mortgage lender about which renovation loan option is best for your financial situation and renovation needs.