Renovation Loans

How Do Home Renovation Loans Work? 

If you’re buying a home that needs repairs, there are multiple loan options available. How a home renovation loan works will depend on the type of financing you decide to apply for. Popular home renovation loan options include the following programs: 

Conventional Renovation Loan:  This loan is a single-close loan that includes the cost of home repairs in the overall loan
amount. This loan can be used for repairs that an appraiser requires, or for changes the homeowner wants to make, and it can be used to pay for both structural and cosmetic repairs. 
This loan appeals to borrowers because they only have to deal with one loan, one monthly payment and lower interest rates that cover both the purchase price and the cost of repairs. You can select either a 15- or 30-year mortgage term, along with adjustable-rate options. With the conventional renovation loan, your final loan amount is based on the projected value of the home after the repairs are completed. This loan option is a sound choice for a buyer with top-notch credit who has access to competitive interest rates. 

FHA 203(k): This government-backed loan is similar to the conventional option, but it’s open to buyers with lower credit scores. This is usually the more expensive option of the two because FHA mortgages have higher mortgage insurance premiums for borrowers who apply with smaller down payments. These mortgages have an upfront fee that’s included in the overall principal of the loan. 

FHA 203(k) loans are divided into full and streamline options, and the type you need will depend on the state of your property. The FHA 203(k) Full Loan is intended for a primary residence that needs serious or significant repairs, while the Streamline Loan is used to cover minor repairs totaling less than $35,000.