Can You Roll Renovation Costs Into a Mortgage?

Homeowners often consider updating their living spaces, and financing these improvements is a key part of the planning. Many wonder if renovation costs can be incorporated into a mortgage to enhance their property without depleting savings. Various financial products allow homeowners to finance renovations alongside their home purchase or through a refinance. Understanding these options clarifies how such projects can become financially feasible.

Types of Renovation Financing Options

Several financial products exist that allow homeowners to combine renovation costs with a mortgage, each serving different circumstances.

FHA 203(k) Loan

The FHA 203(k) loan, backed by the Federal Housing Administration, allows borrowers to finance a home’s purchase or refinance and its rehabilitation costs within a single mortgage. It suits properties needing significant repairs or upgrades. The loan amount is based on the home’s value after renovations are completed.

VA Renovation Loans

Veterans and active-duty service members may qualify for VA renovation loans. Guaranteed by the Department of Veterans Affairs, these loans allow eligible individuals to purchase or refinance a home and include renovation funds. The total loan amount considers the property’s anticipated value after improvements, often without a down payment.

USDA Renovation Loans

USDA renovation loans finance home improvements for properties in eligible rural areas. Backed by the U.S. Department of Agriculture, these loans are for low-to-moderate-income individuals and include renovation costs in the primary mortgage. The program aims to promote homeownership and improve housing in designated rural communities.

Fannie Mae HomeStyle Renovation Mortgage

Conventional options include the Fannie Mae HomeStyle Renovation Mortgage. This flexible loan allows borrowers to purchase or refinance a home and finance a wide range of projects, from minor cosmetic updates to major structural changes. The loan amount can include up to 75% of the property’s “as-completed” value.

Freddie Mac CHOICERenovation Mortgage

The Freddie Mac CHOICERenovation Mortgage functions similarly to the HomeStyle loan. It provides financing for home purchase or refinance and renovation costs, accommodating various improvements. This loan streamlines combining a mortgage with renovation funds, offering a single loan.

Cash-Out Refinance

A cash-out refinance offers a different approach to funding renovations. A homeowner replaces their existing mortgage with a new, larger one and receives the difference in cash. This cash can be used for any purpose, including home renovations, offering flexibility without the project oversight required by dedicated renovation loans. However, it relies on sufficient home equity.

Essential Information for Renovation Loan Applications

Applying for a renovation loan requires specific information and documentation to demonstrate project viability and financial capacity. Lenders require detailed property information, including the home’s address, current market value, and existing mortgage details. This data helps the lender understand the asset’s current state and its potential for increased value.

Scope of Work

A comprehensive plan, often called the scope of work, is necessary. This includes blueprints, detailed designs, and a clear description of all planned improvements. Lenders require this plan to assess project feasibility and cost-effectiveness, ensuring renovations align with the property’s value and loan purpose.

Itemized Estimates and Bids

Applicants must provide itemized estimates and bids from licensed contractors for all materials and labor costs. Lenders prefer multiple bids to ensure competitive pricing and a realistic assessment of expenses. These estimates determine the appropriate loan amount and ensure work can be completed within budget.

Financial Documentation

Standard financial documentation is a prerequisite for any mortgage application. This includes income verification, such as recent pay stubs and tax returns for the past two years, and asset statements from bank accounts, investment portfolios, and retirement funds. Lenders use this information to evaluate the applicant’s ability to repay the loan and assess financial stability.

“As-Completed” Appraisal

Renovation loans often require an “as-completed” appraisal, which estimates the home’s value after proposed renovations. This differs from a standard appraisal, which only considers the home’s current condition. The “as-completed” appraisal ensures the post-renovation value supports the total loan amount, including purchase or refinance price and renovation costs.

The Renovation Loan Application Process

Once all necessary information and documentation are gathered, the application for a renovation loan proceeds through several procedural steps.

Finding a Qualified Lender

The initial step involves finding a qualified lender experienced in the specific renovation loan types. Not all lenders offer every type of renovation loan, so seeking specialists can streamline the process and ensure access to appropriate financing.

Submitting the Application Package

After identifying a suitable lender, submit the complete application package. This includes all compiled property details, renovation plans, contractor bids, and financial documentation. Thorough submission provides the lender with all information needed for loan approval.

Underwriting and Approval

The submitted application undergoes detailed underwriting and approval. The lender verifies financial information and evaluates proposed renovation plans, including contractor bids. The “as-completed” appraisal, projecting the home’s value after renovations, is also reviewed to ensure the project’s financial soundness.

Closing the Loan

Upon approval, the loan moves to closing, where final documents are signed by the borrower and lender. This formalizes the loan agreement and establishes the renovation escrow account, from which funds are disbursed as the project progresses. Loan closing is a milestone, securing financing for the renovation project.

Fund Disbursement and Project Oversight

Following closing, fund disbursement and project oversight begin. Renovation funds are typically released in scheduled draws, tied to the completion of specific construction stages and verified by inspections. The lender oversees the project to ensure work adheres to approved plans and budget, providing financial and quality control until completion.