If you’re considering purchasing a home that requires repairs or improvements, renovation financing could be the perfect solution to make your dream home a reality. Whether you’re a first-time homebuyer or a seasoned investor, understanding the various loan options available can help you choose the best financing program to meet your renovation needs. In this blog post, we’ll explore some popular renovation loan options and how they can help you finance the improvements your new home requires.

Why Consider a Renovation Loan?

Purchasing a fixer-upper home has its advantages. It opens up a broader selection of properties, and often, there’s less competition from other buyers. But what do you do if you’ve found the perfect home, but it needs significant work before it’s livable? Renovation loans allow buyers to roll the cost of repairs into their mortgage, making it easier to afford both the property and the necessary renovations.

Renovation Loan Options to Consider

1. FHA 203(k) Loan

The FHA 203(k) loan is one of the most popular renovation loan options. It comes in two forms: Standard (Full) and Limited (Streamline).

• Standard 203(k): This loan is ideal for major renovations, as it requires a minimum of $5,000 in repairs with no maximum limit, as long as the total loan amount is within FHA county loan limits. It covers almost any type of home improvement project, and the loan amount is based on the home’s after-completion value. Borrowers can even include up to six months of mortgage payments while the home is uninhabitable during the renovation process.
• Limited 203(k): This version is designed for less extensive cosmetic improvements and allows you to borrow up to $35,000. It’s a great option for non-structural repairs such as kitchen, bathroom, roofing, windows, flooring, or updating heating and cooling systems.

2. Fannie Mae HomeStyle Renovation Loan

The Fannie Mae HomeStyle loan provides a conventional option for financing both the purchase and renovation of a property. It’s available for primary residences, second homes, and investment properties. What makes this loan unique is that the loan-to-value (LTV) ratio is based on the property’s post-renovation value, giving buyers the flexibility to undertake larger projects. You can also combine this loan with a HomeReady® mortgage, which offers additional benefits for first-time homebuyers.

3. VA Renovation Loan

The VA renovation loan is an excellent option for veterans and military families. This loan allows eligible veterans to borrow up to $100,000 for home improvements, in addition to the property’s purchase price. With zero down payment required and no mortgage insurance, it’s a cost-effective way for veterans to finance cosmetic repairs or upgrades. Like the Limited 203(k) loan, it’s perfect for non-structural improvements.

4. Repair Escrow

A repair escrow is a unique option that allows buyers to set aside funds at closing to cover necessary repairs. This escrow account holds funds that can be released once the renovations are completed. It’s often used when a seller agrees to make repairs as part of the sale, or when a lender requires repairs to meet certain standards before finalizing the loan.

How to Choose the Right Renovation Loan

Selecting the right renovation loan depends on the extent of the work needed and your financial goals. If you’re looking for a loan that covers substantial structural repairs, the Standard 203(k) or the Fannie Mae HomeStyle Renovation loan may be the best option. On the other hand, if you’re focused on cosmetic updates, the Limited 203(k) or the VA Renovation Loan could be more suited to your needs.

Conclusion

Renovation loans are a powerful tool for homebuyers looking to turn a fixer-upper into their dream home. With multiple options available, from FHA 203(k) loans to VA Renovation Loans, there’s a solution for almost any renovation need. At Informed Mortgage, we’re here to guide you through the process and help you find the right loan to fit your unique situation.

Contact us today to learn more about how renovation financing can work for you!