Last Updated on June 17, 2022 by Luke Feldbrugge
A home renovation loan could be the best option for you to tackle the updates to your home. Does your home need an update? Is your kitchen dated with tired appliances and cabinets? Is it time for your new dream master bedroom with walk-in closets and a spacious master bathroom to come to life? A home renovation loan is great option to consider.
What is a Renovation Loan?
The purpose of a renovation loan is to provide a homeowner with a large sum of money to complete renovations on their home. These can be repairs or updates, like installing a new roof, or an update to your kitchen and bathroom. You must make sure you have properly budgeted your renovation and you know exactly where the money will be going. One of the most popular things to do with a renovation loan is usually the bathroom.
Requirements for Renovation Loans
To obtain a renovation loan, you need to prepare before applying. Start by making sure your credit score is at least 620 and that you have a minimum down payment of three percent. While some lenders don’t require you to have a down payment, it still helps if you do. Lenders will typically require a certain percentage of equity in your current home and mortgage. Equity is the value of your home.
Types of Renovation Loans
There are different types of loans available. Finding the right one that fits your situation and your home can be tricky. Renovation loans can be government-backed or private. Fannie Mae HomeStyle loan and FHA 203(k) loan are examples of loans that are funded by government resources.
Fannie Mae HomeStyle Loan
The HomeStyle loan is well-known and used for renovations. Borrowers can either purchase a home that needs repairs or refinance their home and receive a new mortgage rate that includes the funding for the repairs.
To have the best chances of obtaining this loan, borrowers must have a minimum credit score of 620 and must put down five percent of the home’s purchase price. You will also need to hire a contractor to give an official estimate of the updates or repair costs before the lender will issue an approval.
This loan combines the mortgage and renovation loan. So, you won’t have to go through as much paperwork. The unfavorable element of this loan is that the money lent for the repairs goes into a separate account that pays the contractor directly. Therefore, homeowners don’t have access to those funds.
FHA 203(K) loans
FHA 203(K) loans are offered by the Federal Housing Administration (FHA). It requires a lower down payment than comparable loans. Two different types of FHA 203(K) loans exist:
- Limited FHA 203(K) – The limited FHA loan exists for updates that are mainly cosmetic. This loan caps its funds at $35,000.
- Standard FHA 203(K) – The standard FHA loan is for more substantial remodels and requires you to hire a consultant who is qualified to oversee all the work you do, from the first steps of planning to the result.
Private Home Renovation Loans
Private home renovation loans are typically referred to as equity loans or second mortgage loans. These typically carry a higher interest rate and specific terms determined by the lender, in accordance with federal and state lending laws.
Homes for Heroes Mortgage Specialists Offer Guidance and Savings
Homes for Heroes can assist in finding a loan that is right for you and your household. Whether looking at loan options for emergency repairs, updates, or additions; a renovation loan may be a good option for financing your project.
With all the different loans that exist, it can be confusing to know which one would be the best match. Homes for Heroes and our local mortgage and home loan specialists are committed to making the loan application and underwriting process as easy and painless and possible for our heroes. Sign up today to speak with our specialist in your area to determine the best options for you and your family.
Sign up today to speak with our local mortgage specialist to determine if a renovation loan is right for you.