When buying a house, a common question is, can you add renovation costs to a conventional mortgage? The answer is simply yes, but it also depends on the type of renovation. A renovation mortgage is a special type of loan that lets you borrow money based on the property’s value after renovations.
A cash-out refinance can add renovation costs to a conventional mortgage. Contact your mortgage broker to learn your options. Below is a complete guide to different rehab loans, including their pros and cons, benefits, and requirements.
How Can You Add Renovation Costs To Conventional Mortgage?
You can add renovation costs to your mortgage. It can be used to buy the house and cover renovation costs, paying it off in monthly installments. The lender will release the funds as the work progresses. After the renovations, you can switch to a regular mortgage. Keep in mind that you might need to pay for regular inspections.
Credit unions, banks, and private lenders offer conventional mortgages as they are based on the home’s current value, not its future value after renovations. You only need a low debt-to-income ratio and good credit to qualify.
Benefits Of Home Renovation Loans
A conventional mortgage not only increases your home’s value after renovations when combined with a home renovation loan. These loans also help homebuyers who couldn’t get a traditional loan or didn’t consider buying a house that needs work.
Types Of Home Renovation Loans
You can choose government-backed mortgages like Fannie Mae or FHA loans or any conventional loan. These loans depend on several factors, like down payment, income, and credit score. There are several options available, each with its pros and cons.
1. FHA 203(k) Loans
FHA 203(k) loans, insured by the Federal Housing Administration, let homebuyers borrow funds for both the property and repairs. These loans will let you combine your mortgage and renovation costs into one loan with a single monthly payment to help lower-income homeowners or those who have a limited down payment or poor credit. The loan amount is based on your home’s value after renovations.
Pros & Cons
FHA loans offer many benefits due to their down payment of 3.5% or 10% and a minimum credit score of 500. They have low closing costs and a high loan-to-value ratio of 96.5%. They offer two loan type options, including Limited 203(k) for minor renovations and Standard 203(k) for larger projects over $35,000. These options cover home refinancing, purchasing, and renovations.
They also have some drawbacks, like your house must be at least a year old and should be your primary residence. You’ll have to provide documentation for planned repairs and work with an FHA-approved lender. The upgrades require approval, and it is only for single-family residences and not suitable for move-in-ready homes. Plus, your home renovations must be done by a licensed contractor.
2. Freddie Mac CHOICERenovation Loans
Freddie Mac CHOICERenovation loans, also known as Freddie Mac Renovation Mortgages, let homebuyers combine the cost of buying a home and renovating it into one loan. They offer financing options for multi-unit properties, single-family homes, investment properties, and second homes. You can choose adjustable-rate or fixed-rate loans with repayment terms of 15 to 30 years.
They allow borrowers to finance renovations up to 75% of the home’s post-renovation value. Their down payments might be higher for multi-unit properties and can be lower than 20% for single-family homes. To be eligible, borrowers typically need a minimum credit score of 620 and a down payment of 3% to 20%.
Pros & Cons
The CHOICERenovation Mortgage offers less strict credit requirements and lower down payments. It’s suitable for various properties while allowing for high loan amounts, making it a flexible option.
They have a lengthy approval process, especially when buying properties like auction homes or foreclosures. The borrowers can’t be related to or affiliated with the builder, developer, or seller of the property. Plus, manufactured homes aren’t eligible.
3. Fannie Mae HomeStyle Renovation Loans
Fannie Mae’s Homestyle Renovation Loan combines purchase or refinance costs with renovation expenses. They offer adjustable or fixed rates, with loan limits based on conventional mortgage maximums, and are ideal for rehab investors, allowing funding for various projects, from luxury upgrades to repairs.
An evaluation of the property and planned renovations is required to qualify. The process involves approved contractors submitting work plans for payment draws after inspections. This flexible loan covers various costs like living costs for rental properties, renovation expenses, backup funds for unexpected expenses, permits, and license fees.
To be eligible, you must have a credit score of 620, a down payment of 3% to 25%, varying as per your property type, and a debt-to-income ratio under 50%. Plus, you’ll need documentation from an approved contractor before loan acceptance.
Pros & Cons
The loan requires a minimum 3% down payment and 3% equity for refinancing. They have no upfront mortgage insurance fee and can be combined with other Fannie Mae products.
They have higher interest rates, especially with low credit or high debt and significant closing costs. You may require extra paperwork and a huge loan limit of almost $550k of the property’s as-is value. The renovation costs are limited to 75% it must be completed within a specified timeframe. Plus, they have a longer closing process.
4. Jumbo Renovation Loans
Jumbo loan renovation mortgages are ideal for higher-priced homes with renovations exceeding conventional limits. They are available for major non-structural renovations like kitchen renovations or complete bathroom overhauls, as well as cosmetic repair, even as changing floors or walls in garage renovations.
Only single-family homes are eligible for these loans. For eligibility, one should have a strong credit score of almost 680 plus, a high income, a debt-to-income ratio of 43% or below, and a minimum 10% down payment.
Pros & Cons
Jumbo renovation loans can cover renovations on larger or higher-priced homes and have additional funding for cosmetic improvements.
The renovation costs are limited to 30% of the completed project’s value while excluding major structural work, such as additions or teardowns.
Bottom Line
To start a fixer-upper project or a home improvement project, try to consult a reputable mortgage lender to explore your financing options and understand the specific requirements. I hope the above guide regarding your query of can you add renovation costs to conventional mortgage will be enough for you. But if you still need any assistance, comment down, and the experts at smartfixhome.com will be there for you.
Frequently Asked Questions (FAQs)
What Is A Conventional Mortgage With Renovation Costs?
It’s a home loan that bundles the purchase price with funds for repairs or upgrades, letting you finance both at once.
Can You Add Renovation Costs To A Conventional Mortgage?
Yes, many lenders offer options like the HomeStyle Renovation loan, which lets you include renovation expenses in your conventional mortgage.
How Does Adding Renovation Costs To A Conventional Mortgage Work?
Lenders combine your home’s purchase price with the renovation budget, basing the total loan amount on the expected post-renovation value through a single appraisal and closing.
What Are The Benefits Of Including Renovation Costs In Your Mortgage?
This method simplifies financing by merging purchase and renovation into one loan, often at a lower rate than separate loans, and can increase your home’s value once improvements are completed.
What Requirements Must A Borrower Meet To Add Renovation Costs?
Borrowers typically need good credit, stable income, and a low debt-to-income ratio, while the proposed renovations must be approved and appraised by the lender.
