A couple renovating a room

Home renovation loan frequently asked questions

A home renovation loan is a type of mortgage specifically for funding home improvement projects, like remodeling your kitchen, replacing old plumbing or electrical systems, installing a new roof or upgrading your home’s energy efficiency.

The benefit of a home renovation loan is that you can buy or refinance a home and make improvements with just one loan and one monthly mortgage payment. By consolidating the costs to purchase or refinance with your estimated remodeling costs, you’ll pay for renovations over the life of your loan instead of all at once.

We’re here to answer some of the most common questions about home renovation loans, from qualification requirements to available mortgage options. Whether you’re planning a major remodel or just looking to spruce up your home, we hope this guide will help you make informed decisions about your financing options.

1. What are the benefits of a home renovation mortgage?

A home improvement mortgage can make your renovation experience more affordable and accessible. In addition, because this type of loan allows you to finance the cost of home improvements into your mortgage, you can avoid taking out multiple loans or credit lines.

Renovating with a home improvement loan can increase the value of your home, making it a wise investment. Not only can it improve your home’s visual appeal, but it can also increase its functionality, energy efficiency and overall comfort.

A home renovation mortgage allows homeowners to customize their living space to fit their lifestyle and preferences, creating a more enjoyable and personalized living experience. Overall, a home renovation mortgage can be a great way for homeowners to invest in their homes and make them a more comfortable and valuable place to live. Discover the advantages of a renovation loan with these benefits:

  • Only one loan

    Buy or refinance a home and make improvements with just one loan and one monthly mortgage payment.

  • Make updates to suit your style

    Customize your home to fit how you live.

  • Location, location, location

    Buy a fixer-upper in a neighborhood you love, or stay where you are and make it your dream home. Renovation programs are eligible in the following states: AK, AZ, CA, CO, CT, DC, DE, FL, GA, HI, IA, ID, IL, IN, KS, KY, LA, MA, MD, ME, MI, MO, MT, NC, NE, NJ, NM, NV, OH, OK, OR, PA, RI, SC, TN, TX, UT, VA, WA, WI and WY.

  • You may benefit at tax time

    Take advantage of tax-deductible interest since the remodeling costs are all in your first mortgage.

  • Borrow more

    You can borrow more money because the loan amount is based on an appraiser’s estimate of your property’s worth once the improvements are finished.

  • Spread out the costs

    Pay for the cost of renovations over the life of your loan instead of all right now.

2. What loans are available for renovations?

Depending on the types of improvements that you want to make to your home, we offer three purchase and refinance renovation options with just one loan and one monthly mortgage payment.

Conventional renovation

If you want to make energy-efficiency improvements, landscape your backyard or install a swimming pool, our Conventional loan may be the right program for you. FNMA HomeStyle Renovation loans offer a low-down payment option and flexibility to choose from a wide range of renovation projects. Buy a fixer-upper and make it your own, or refinance to update a home that no longer meets your needs.

  • Types of improvements covered: Health and safety, livability, structural repairs and luxury items
  • Occupancy types: Owner-occupied, second homes and investment properties
  • Consultant requirements: Consultant not required

If you plan on making energy-efficient improvements like installing smart thermostats, upgraded windows or solar systems, you can bundle a HomeStyle Renovation loan with an FNMA HomeStyle Energy mortgage option.

FHA 203(k)

When you’re in the market to buy a fixer-upper, an FHA 203(k) mortgage may be just the product that can help. This government loan is a good option for larger, more complex projects that cost no less than $5,000, including health and safety improvements with the flexibility of a low-down payment. FHA 203(k) mortgages are designed exclusively for borrowers upgrading their primary residences, in other words, a house you will live in.

An FHA 203(k) loan can help pay for fixing up a house, but there are some projects it won’t cover. For example, you typically can’t use it to install a swimming pool or build an outdoor kitchen. If you’re unsure your project qualifies, it’s best to talk to a loan officer.

  • Types of improvements covered: Health and safety, livability and structural repairs
  • Occupancy types: Owner-occupied
  • Consultant requirements: HUD consultant required

FHA 203(k) Limited

This limited loan is a good program if you only want to make minor repairs or cosmetic improvements like new flooring or appliance upgrades, including those recommended by an FHA home inspector. It’s designed to finance projects that can be completed quickly and easily and provides financing for up to $35,000.

  • Types of improvements covered: Health and safety and livability
  • Occupancy types: Owner-occupied
  • Consultant requirements: HUD consultant not required

3. Can I use a HELOAN or HELOC* for home improvements?

You can use a home equity option for several types of big life expenses, home improvements included. You can also pay tuition, consolidate debt, purchase a second home or tackle an emergency expense. Home equity loans are based on your current home equity rather than the estimated improved value of your home after improvements.

Access your home’s equity through a HELOC or HELOAN to get the cash you need.

  • A HELOC is a line of credit secured by your home. Since HELOCs rely on your home’s equity, you can’t borrow more than the value of equity in your home, which is the value of your home minus the amount you owe on your first mortgage.
  • A home equity loan (HELOAN) provides up to 95 percent of your home’s equity as a piggyback second mortgage.

4. How do I qualify for a home renovation loan?

While there may be some similarities in the requirements for a home renovation loan, your financial situation and plan to fix up your property makes your qualification requirements unique.

However, common factors are considered when evaluating your loan application. Usually, you need to have good credit and be current with your other major expenses, and you can’t have lost a property to foreclosure in the past three years. It might be harder to qualify if you owe the government any taxes. Like other FHA loans, you can pay as little as three and a half percent down and still be approved for an FHA 203(k) loan. A Conventional renovation loan requires a minimum down payment as low as three percent.

5. How does an FHA 203(k) loan work?

Applying for a renovation loan requires providing similar information that you would for most other home loans, such as information about your income, assets and liabilities. The notable difference is that you’ll submit a cost breakdown and documentation for your desired renovation and hire a contractor before loan approval.

6. What are the home renovation loan process steps?

After you’ve received your pre-approval letter, Guild Mortgage home renovation loans and FNMA HomeStyle Renovation follow this process:

  1. Your renovation loan specialist will help ensure you’ve selected a licensed contractor and finalized the cost breakdown for your renovations.
  2. Once improvements are made, an appraisal is ordered of the property value.
  3. The general contract approval process is then completed, and the loan processing team reviews your file and submits your application to the underwriter.
  4. The underwriter reviews your loan application and issues the credit decision.
  5. Once the credit and property have been approved, your loan will move to closing, and you’ll attend your closing meeting.
  6. After your loan closes, your loan balance will be held in a Construction Holdback Account, and you can start your home improvements.
  7. Our partner, Land Gorilla, will assign you a dedicated Construction Loan Administrator (CLA) who will become your point of contact. The CLA communicates with you and coordinates the needs of the contractor, the inspector, the title company and Guild Mortgage during renovation. The CLA manages the process of obtaining the funds by making “draw requests” as improvements are made. Draw requests can be made online through the Land Gorilla Construction Loan Manager website or requested via email directly to the CLA.

7. How can I use a home renovation loan?

Depending on the type of home renovation loan that you choose, you can upgrade, remodel or repair almost anything:

  • Remodel your kitchen and bathroom
  • Make your home more energy-efficient
  • Upgrade electrical and plumbing
  • Heating and air conditioning (HVAC) system installation
  • Create an accessible entry and make improvements to livability
  • Eliminate health and safety hazards
  • Repair cracked slabs or make structural improvements
  • Install new flooring, windows and doors
  • Lead-based paint and mold abatement
  • Adding or repairing roofs, gutters and downspouts
  • Build second stories and room additions
  • Repair cracked slabs or make structural improvements
  • Install swimming pools, outdoor entertainment areas and landscaping
  • Weather stripping and insulation upgrades
  • Add an accessory dwelling unit (ADU), also known as a granny flat
  • Rebuild an entire house on an existing foundation
  • And many others

8. How can I refinance with a renovation loan?

Renovation loans are designed to allow borrowers to refinance their existing mortgages and include renovation costs in the new loan. This can be a good option if you’re looking to finance large home improvement projects. Here’s how the renovation loan refinance process works:

  • You provide us with a cost breakdown for the renovation, and we appraise your home as if the renovation work has already been completed, giving us the after-renovated value
  • A refinance renovation loan uses the after-renovated value to allow you to tap into future equity now
  • We provide you with one new loan that includes the renovation funds for your project

It’s essential to carefully consider the costs and benefits of refinancing with a renovation loan and to work with a trusted local lending team who can help guide you.

9. What are the renovation home loan requirements?

Here are a few key repair guidelines to keep in mind:

  • Generally, you can’t be the one who is making the home improvements. A trained and officially licensed contractor needs to do the labor. It’s always best to leave fixes to the experts, especially since the updates are designed to make the home more valuable.
  • Your project must begin and finish within a certain time frame. Typically, work must begin within 30 days of closing, cannot stop for more than 30 consecutive calendar days and must be completed within six months.
  • Regular updates on the progress of the work are required every 30 days.

10. What costs and fees can be financed with a home renovation loan?

In addition to financing the purchase price of your new home or existing mortgage balance, if you’re refinancing, a home renovation loan ​​covers renovation or repair costs. These costs may include materials, labor, a contingency fee for items that come up during the renovation process, permits, architect or engineer fees, inspections, title update and consultant fees if applicable.

11. Final thoughts on home renovation mortgage loans

An FHA 203(k) is a good option if you’re planning on a larger or more complex project and need the flexibility of a low down payment. However, you should weigh the pros against these cons before deciding if this is the best renovation loan option for you:

  • Requires FHA mortgage insurance
  • Can’t be used for an investment property unless you live in one of the units full-time
  • May require a HUD consultant and an experienced contractor
  • Limits the kinds of projects that can be carried out

12. How do I get started?

We can help you navigate the path to making home improvements to create a home your family loves. Connect with a renovation loan specialist in your area who will help you get pre-approved and better understand your renovation loan options.

*These are brokered loan products. State restrictions and eligibility requirements will apply based on investor guidelines.

The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.

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About the Author: Guild Mortgage

Founded in 1960 when the modern U.S. mortgage industry was just forming, Guild Mortgage Company is a nationally recognized independent mortgage lender providing residential mortgage products and local in-house origination and servicing. Guild’s collaborative culture and commitment to diversity and inclusion enable it to deliver a personalized experience for each customer. With more than 4,000 employees and over 250 retail branches, Guild has relationships with credit unions, community banks, and other financial institutions and services loans in 49 states and the District of Columbia. Guild’s highly trained loan professionals are experienced in government-sponsored programs such as FHA, VA, USDA, down payment assistance programs and other specialized loan programs. Guild Mortgage Company is a wholly owned subsidiary of Guild Holdings Company, whose shares of Class A common stock trade on the New York Stock Exchange under the symbol GHLD.