A home renovation loan lets you finance a home and the cost of repairs or improvements in a single mortgage. Instead of buying a home and paying for renovations separately, you borrow enough to cover both at once. This can be a smart way to buy a home that needs work and turn it into the home you want.
The short answer: a renovation loan combines your purchase or refinance and your renovation costs into one loan, based on the home's value after the improvements. Learn more on our rehab loan page.
How a renovation loan works
With a renovation loan, the loan amount is based on the home's projected value after the improvements are complete, not just the current value. This lets you borrow enough to buy the home and pay for the renovations.
The process typically involves:
- A purchase or refinance agreement on the home
- A contractor's bid or estimate for the renovations
- A plan and budget for the work
- An appraisal that considers the home's value after the improvements
- Loan approval based on the as-completed value
- Renovation work, with funds often held in escrow and released as the work is completed
Types of renovation loans
Different programs finance renovations in different ways. Some common options include:
- FHA 203(k): an FHA-insured loan that lets you finance a home and certain repairs or improvements.
- Conventional renovation loans: lender programs that finance a home and renovations in one loan.
- VA renovation loans: for eligible veterans and service members, combining VA financing with renovation funds.
Each program has its own rules for eligible properties, repairs and loan amounts. A licensed loan officer can help you compare mortgage loan options for your situation.
What can renovation funds be used for?
Eligible expenses can include:
- Roof, plumbing and electrical repairs
- Heating and cooling systems
- Kitchen and bathroom updates
- Flooring and paint
- Energy-efficient improvements
- Accessibility improvements
Some programs have minimum and maximum repair amounts, and some work must be done by licensed contractors. Cosmetic-only repairs may be limited in some programs.
Property condition and contractor estimates
Renovation loans are designed for homes that need work, so the property condition is part of the process. You typically need:
- A contractor's bid or estimate for the work
- A plan that shows what will be done
- An appraisal that considers the as-completed value
- Inspections as the work is completed
Funds for the renovations are often held in escrow and released as the work progresses, which protects you and the lender.
How to compare renovation loan programs
- Compare down payment and credit requirements.
- Ask about eligible repairs and any minimum or maximum repair amounts.
- Compare rates, terms and mortgage insurance.
- Ask how renovation funds are disbursed.
- Confirm whether the work must be done by licensed contractors.
Frequently asked questions
Can I finance renovations with a regular mortgage? A regular mortgage is based on the home's current value and usually does not include renovation costs. A renovation loan lets you borrow based on the as-completed value.
Do I need a contractor? Most renovation loan programs require a contractor's bid or estimate, and some require licensed contractors for the work.
How are renovation funds disbursed? Renovation funds are often held in escrow and released as the work is completed and inspected.
Can I use a renovation loan to refinance? Yes. Some renovation programs work with a refinance, letting you update your current home and finance the improvements.
Ready to explore renovation financing?
When you are ready, get a free quote or get pre-approved with Alex.
You can also call Alex Al-Ammar at (313) 992-9898 or email Alex@vestalending.com.
This article is for general information only. It is not legal, tax or financial advice. Renovation loan programs, eligible repairs and requirements vary by lender and program. Speak with a qualified professional about your individual situation.
