What are the Different Types of Renovation Mortgage Loans?

FHA 203(k)

Are you considering a Federal Housing Administration (FHA) loan? You can add renovations to your FHA mortgage with the FHA 203(k) program.

The FHA 203(k) is a renovation mortgage that’s insured by the federal government, but you borrow the money through a private lender. Because the federal government is backing the loan, it’s easier to get financing if you have a low credit score or plan to make a smaller down payment.

FHA 203(k) mortgages can be used for major repairs, cosmetic updates or smaller renovations.

The FHA 203(k) comes with a specific set of requirements

• The home must be at least a year old.
• You need to borrow a minimum of $5,000 for renovations.
• You must work with an approved contractor.
• Projects must be completed in 6 months.
• The post-renovation value of the property should be below your local FHA mortgage limit.

For renovations that cost $35,000 or more, the government will require you to work with an approved 203(k) consultant to help you navigate the process.

Fannie Mae HomeStyle® Renovation mortgage

If you’re looking for flexibility with your home upgrades, the Fannie Mae HomeStyle® Renovation mortgage could be the right fit. The loan allows you to make practically any improvement. You can put in new landscaping, replace the roof or install a few luxury upgrades.

To qualify for the HomeStyle® mortgage, you’ll need a credit score of at least 620 and a DTI that doesn’t exceed 45%.

The Fannie Mae HomeStyle® Renovation mortgage offers flexible terms:

• It can be used on practically any property type.
• It’s available for second homes and investment homes with a larger down payment.
• There is a minimum 5% down payment. If you combine a HomeStyle® Renovation mortgage with a HomeReady® mortgage, the down payment minimum drops to 3%.
• Renovations must be permanent and add value to the property.
• Projects must be completed in 1 year.

Freddie Mac CHOICERenovation® mortgages

Freddie Mac CHOICERenovation® mortgages are a cost-effective way to finance home and remodeling projects. You can either get a fixed-rate loan or an adjustable-rate loan. Your lender can combine the loan with the Freddie Mac Home Possible® or HomeOne® programs to lower your down payment to 3%.

The CHOICERenovation® loan is open to everyone, but it’s geared toward first-time home buyers, multigenerational households or homeowners who want to age in place.

While the program doesn’t apply a minimum credit score requirement, your lender probably will. If your credit score is at least 620, you’ll likely be in a better position for mortgage approval. And every lender sets their own debt-to-income (DTI) ratio requirement.

CHOICERenovation® mortgages can be customized to suit a range of properties and projects.

• They can be used for single and multi-unit primary residences.
• They are available for single-unit second homes and investment properties.
• They can be used for disaster-proofing renovations.
• Renovations must be completed in 1 year.

CHOICERenovation® mortgages also allow you to work with a home improvement store for renovations. That’s a big perk if you can’t find (or afford) an approved contractor. As long as you qualify for the total loan amount, your renovation costs can be up to 75% of the as-completed appraised value.

VA renovation loan

If you’re a qualified active-duty service member, a veteran of the U.S. armed forces or a surviving spouse, consider applying for a VA renovation loan, which is backed by the Department of Veterans Affairs.

Like other VA loans, a renovation loan (also referred to as a rehab loan or alteration and repair loan) lets you buy a home with no down payment and low-interest rates, and you won’t need to pay mortgage insurance.

Every lender sets their own credit requirements. Typically, you’ll need a credit score of at least 620, but lenders will examine your overall finances before deciding to give you a loan. The terms of the loan also require you to work with VA-approved contractors and appraisers.

VA renovation loans have several important restrictions:

• Only available for a primary residence
• Renovations must improve safety or habitability
• Cannot be used for luxury upgrades or structural repairs
• Renovations usually capped at $50,000
• Project(s) must be completed in 120 days

USDA renovation loan

Lower-income borrowers can purchase and upgrade homes in rural areas with USDA renovation loans. If you meet the U.S. Department of Agriculture’s income requirements, you can finance the house with a fixed-rate loan and no down payment.

USDA renovation mortgages allow for relatively small upgrades. The renovation budget usually maxes out at $35,000. If you need to make structural repairs, the USDA will allow you to borrow more than $35,000 for renovations.

USDA rehabilitation and repair loans have unique requirements:

• Require a general contractor
• Available for primary residences
• Not available for investment properties
• Manufactured homes and condos aren’t eligible
• Can be used to repair existing features
• Cannot be used to install new luxury amenities

Renovation Mortgage Options at a Glance

What Are the Pros and Cons of Renovation Mortgages?

Renovation mortgages can be a good idea if you want to use a single loan to buy and rehab a fixer-upper. They come with affordable terms, so you’ll likely pay less in interest and fees.

They’re also a lot of work for everyone involved. You can expect lots of upfront planning and paperwork. If you know what you want and you’re prepared to jump right into construction, the process can run smoothly.

Consider the pros and cons to decide if a renovation mortgage fits your financial circumstances.