If you’ve found a home that needs a little TLC, or you’re considering upgrading your current home, you might be wondering how to finance those renovations. Is there such a thing as a home improvement loan?
A home renovation loan can be the perfect solution to help turn a fixer-upper into your dream home. Peregrine Financial's expert mortgage lenders, can help walk you through the process of getting a home renovation loan, the different types of home improvements available, and how to qualify with the help from a mortgage loan originator.
What Is a Renovation Loan?
A renovation loan is a type of mortgage that allows you to finance both the purchase of a home and the cost of renovations or, if you already own a home, fund improvements. These loans are particularly useful for buyers who want to invest in a home that needs repairs, or for homeowners looking to increase their property value through a home improvement project.
Types of Renovation Loans
There are several types of renovation loans available, each with its own benefits and requirements.
FHA 203(k) Loan - This government-backed loan allows homebuyers to finance both the home purchase and renovations in a single mortgage. There are two types:
Limited 203(k): Ideal for minor repairs and renovations up to $35,000.
Standard 203(k): Best for major renovations, requiring oversight by a consultant approved by the FHA (Federal Housing Administration).
Fannie Mae HomeStyle Loan - A conventional renovation loan that allows borrowers to finance renovations up to 75% of the home’s as-completed value. It offers flexibility in the types of renovations covered and is available to both homebuyers and current homeowners.
Freddie Mac CHOICERenovation Loan - Similar to the HomeStyle loan, this option allows for financing home improvements within a conventional mortgage. It is designed for homebuyers, existing homeowners, and even investors in some cases.
VA Renovation Loan - For eligible veterans and active-duty military members, a VA renovation loan combines home purchase and renovation costs into one mortgage, allowing for repairs and upgrades without the need for private mortgage insurance (PMI).
Personal Loans or HELOCs for Renovations - If you already own a home and have built up equity, you might consider a home equity line of credit (HELOC) or a cash out refinance to fund renovations. These options can offer flexibility but often come with higher interest rates than mortgage-based renovation loans or loans with fixed interest rates.
How to Qualify for a Renovation Loan
To qualify for a renovation loan, lenders will evaluate several factors to make sure you can afford both the home's current mortgage, and the renovation costs:
Credit Score: Most lenders require a minimum credit score of 620-640 for conventional renovation loans, while FHA 203(k) loans may allow scores as low as 580.
Income and Employment: Lenders will review your income, employment history, debt consolidation plans, and debt-to-income (DTI) ratio to assess your ability to repay the loan.
Property Eligibility: Some loan programs have restrictions on the type of property eligible for financing, so check whether your desired home qualifies.
Contractor Approval: Many renovation loans require that renovations be completed by a licensed contractor, so be prepared to submit contractor estimates and plans.
Steps to Getting a Renovation Loan
Determine the Right Loan for Your Needs - Start by assessing the type of renovations you need and choose a loan that aligns with your financial situation and goals.
Get Pre-Approved - Before house hunting or planning renovations, Peregrine Financial's Santa Clarita mortgage brokers can help you get pre-approved for a renovation loan. This helps you understand your budget and what loan options are available to you.
Find a Home and Assess Renovation Costs - If you’re purchasing a home, work with a real estate agent to find a property that meets your needs. Peregrine has an in-house real estate agent that can help you find the best home for you. Get contractor estimates for the renovations you plan to make.
Submit a Loan Application - Once you’ve chosen a home and outlined renovation costs, submit your loan application with all required documentation, including contractor bids and renovation plans.
Get an Appraisal - Lenders will order an appraisal based on the home’s future value after renovations. This ensures the loan amount aligns with the completed home’s worth.
Close on the Loan and Begin Renovations - After closing, funds for renovations are typically placed in an escrow account and distributed as work is completed. Depending on the loan type, there may be inspections to verify progress.
Complete the Renovations and Enjoy Your Upgraded Home - Once renovations are finished, you can enjoy your improved home while paying off the mortgage under the agreed loan terms.
Benefits of a Renovation Loan
Allows buyers to purchase and upgrade a home in one mortgage.
Helps homeowners increase property value and customize their space.
Provides potentially lower interest rates compared to personal loans or credit cards.
Offers financing for necessary repairs, making homeownership more accessible.
Home Renovation Personal Loan Rates
A renovation loan is a great way to finance home improvements, whether you’re buying a fixer-upper or upgrading your current home.
If you’re ready to explore your renovation loan options, reach out to our experienced mortgage team so we can guide you through the process and help you find the best financing solution for your renovation.
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