A home renovation loan provides homeowners with the financing they need to repair their property.
Renovation loans may take the shape of mortgages with built-in fixer-upper money or personal loans. Depending on the type of loan, you may be required to prove that the funds were spent on the house or paid to a contractor.
How Do Home Improvement Loans Work?
Several loan choices are available if you are purchasing a home that needs repairs. The type of financing you seek will determine how a home remodeling loan operates. The following programs are popular home improvement financing options:
- HomeStyle® by Fannie Mae: The Fannie Mae HomeStyle® loan is a one-time closing loan that includes the cost of home repairs in the loan amount. This loan can be used to pay for both structural and cosmetic repairs, and it can be used to pay for repairs that an appraiser requires or improvements that the homeowner wishes to make.
Borrowers like this financing because they have to deal with one loan, one monthly payment, and cheaper interest rates that cover the purchase price and the cost of repairs. You can choose between a 15-year and 30-year mortgage term, as well as adjustable-rate mortgages. Your ultimate loan amount with a HomeStyle® mortgage is based on the home’s estimated worth once repairs are completed. Fannie Mae’s HomeStyle® loan is an excellent option for a buyer with excellent credit and access to reasonable interest rates.
- FHA 203(k): Similar to HomeStyle®, this government-backed loan is available to buyers with lower credit ratings. Because FHA mortgages have higher mortgage insurance costs for borrowers who apply with lesser down payments, this is usually the more expensive option of the two. These mortgages contain an upfront fee that is rolled into the loan’s ultimate balance.
FHA 203(k) loans are classified as either full or streamlined, and the condition of your property will determine the type you require. For example, the FHA 203(k) Full Loan is for a principal residence that requires substantial renovations, whereas the Streamline Loan is for minor repairs costing less than $35,000.
- “C” conventional: EZ “C” conventional: This loan can be utilized in conjunction with traditional mortgages for non-structural home repairs that increase the property’s value. It includes both appraiser-mandated and borrower-chosen modifications.
A jumbo renovation loan is similar to an EZ “C” conventional loan, except it is utilized for higher-priced homes that other home repair loans don’t cover. Jumbo renovation loans can be utilized for renovations mandated by an appraiser or for repairs requested by the borrower. Non-structural repairs that add value to the home are required.
- Loans for Home Repairs from the USDA Rural Development: The USDA provides money through its Rural Development program to assist homebuyers in obtaining safe, adequate housing. This financial help can be used to pay for new appliances, foundations, siding, roofing, windows, plumbing, electrical upgrades, and other health and safety improvements. Eligibility for the program is determined by income (up to 50% of the area’s median income) and rural location.
A home renovation loan is not your only choice if you cannot afford to fund your home upgrades out of pocket. A home equity loan or home equity line of credit (HELOC) is also an option that is less expensive than a personal loan. This is a good alternative if you have some equity in your house but less-than-perfect credit. The distinction between the two is that a home equity loan is a lump sum with a fixed rate, but a HELOC has variable rates that fluctuate with mortgage interest rates. Home Renovation loans may take the shape of mortgages with built-in fixer-upper money or personal loans. Depending on the type of loan, you may be required to prove that the funds were spent on the house or paid to a contractor.