Combined Mortgage and Renovation Loans

There are several home improvement loans available. They fall into two groups: conventional and not conventional loans.

Conventional Renovation Loans

These would be loans that are not insured by the Government.

Currently, the most common two are HomeStyle and ChoiceRenovation.  The first one is offered by Fannie Mae, the second one by Freddie Mac.

Both offer money for the purchase or refinance of a 1-4 unit property plus money for fixing up that property, in one loan.

Advantages of Conventional Renovation Loans (Over Government-Insured Ones)

With conventional renovation loans orrowers can:

  1. add or repair luxury items (barbecue pits, swimming pools, etc),
  2. loan limits are higher
  3. there are no mortgage insurance premiums once borrowers have 20% equity.

Maybe you want to buy a house in a neighborhood where ready-to-move-in houses are too expensive for you, maybe you live in a house that needs remodeling, maybe you just fell in love with a house that can stand some rehabbing, and you’re wondering if you can get a home loan with a bit extra for improving it.

Disadvantages of Conventional Renovation Loans (Over Government-Insured Ones)

There is only one disadvantage and it is big:

The minimum down payment (equity) required for 2-4 unit properties is much higher (see comparison chart at the bottom of the article).

You go to your computer and search for things like: rehab loans for first-time-home buyers, home loans that allow for renovations, refinance and home improvement loan, home loan with improvement money, refinance mortgage for home improvement.

And you get flooded with sites about FHA 203K loans, Fannie Mae’s HomeStyle Renovation Loans. And your head starts spinning.

But, maybe, you don’t fit into FHA’s , Fannie Mae’s or Freddie Mac’s renovation loan programs.  Or, maybe, you just don’t like it when your heads starts spinning.  Then what?

Then you read this article, duh!

Home Improvement Loan Options

Let’s start with the answer to: What are home improvement loans?

Home improvement loans are loans that allows people to make improvements / repairs to a home with a first mortgage and not a second mortgage or HELOC (home line of credit).
The money borrowers combine the mortgage loan amount and the amount required to fix the house.

So, if you’re buying a house for $200,000 that needs $50,000 in repairs, and you’re putting down $20,000, your loan amount is $230,000.  (As long as the property value will be high enough once you fix it.)

The $50,000 repair funds are going to be paid back over the life of the loan.  For example, if you get a 30-year, fixed mortgage, both your mortgage funds and rehab funds will be amortized over 30 years and you’re expected to pay them back in equal monthly amounts over 30 years.

There are several major sources of renovation loans: Fannie Mae, Freddie Mac and FHA.
Fannie Mae’s version is called HomeStyle Renovation.  Freddie Mac calls its version renovation loans.  The FHA has 2 versions: Standard 203k and Limited 203K Renovation Loans.
Most lenders that provide loans that provide mortgage and repair funds together in one loan go with one of the above entities’ program.  Some lenders add rules on top of the rules these entities have (overlays), some do not.  But lenders can set up their own program.  This means that a particular borrower may qualify for a loan from one lender and not qualify for a loan from another lender even if they applied at the same time.

Getting A Renovation Loan – The First Step

Technically, any lender can set up its own renovation mortgage program, independent of everybody.  In practice, most renovation loans that are offered have Fannie Mae, Freddy Mac and FHA’s renovation loan programs in mind.

Some lenders have no overlays, if a borrower fits one of the three programs above, they fit the lender’s program.  Others have overlays; they add one or more rules on top of the rules the three programs above have. That means that some lenders might reject a borrower while others would accept him/her.

In any case, the first thing to do when you are interesting in applying for a mortgage that includes rehabbing costs is to ask yourself a few questions:

How big of a loan do I need?

The reason you need the answer to this has to do with loan limits Fannie Mae, Freddie Mac and FHA have and with debt-to-income ratios.  The FHA lends to people who spend more of their income on debt payment, which means those people can buy more expensive houses the FHA route than the conventional route.

Am I going to do anything structural?

All three entities allow for structural changes; however, FHA has 2 renovation programs: the Standard 203k and the Streamlined 203K.  The Standard 203k is the one that allows for structural changes and the one not offered by all lenders that offer FHA renovation loans.

The difference between that two 203K programs?  The Streamlined version only requires a contractor’s bid; the Standard version requires that an FHA consultant get involved.

The FHA consultants are the one that decides which repairs are mandatory and which are a good idea to have but not necessary yet, and which are merely desired by the borrower.  If they determine that something is mandatory, it has to be done, regardless of what borrowers, appraisers, or anyone else things.

And, of course, they charge a fee.  So, getting the loan is a tad more expensive.

Am I going to be adding luxury items?

Here luxury is not defined by the quality of the materials used but by how the items added / repaired are used; granite counter tops (even the most expensive granite) do not fall under the luxury umbrella (you need counter tops) but a swimming pool (even the cheapest of them all) does (you don’t need to swim… or, anyway, not within your property.

The reason to ask yourself this question?  FHA does not allow luxury items to be paid from FHA loans.  So borrowers who want to add /repair a swimming pool, or some other luxury item (as per FHA’s definition of luxury), they can either get a conventional renovation loan or they pay for the luxury items some other way.

The drawback of mortgage and rehab loans wrapped into one, compared to your other options (if you already own the home) – HELOC;s or refinancing?  The repair money is held in an escrow account and can be disbursed only as set up, when certain repairs have been completed.

In other words, you can’t change your mind about how you use the money, you can’t say, I’ll fix the roof next year, I’m going to Las Vegas today.

Getting A Renovation Loan – The Next Step

The next step is to get a loan officer who can get you a loan at an interest rate you like at a price you like who looks like someone you’d have an easy time working with and applying for your renovation loan.

Applying means both filling out an application form and providing the necessary documents.  At the minimum, expect to have to provide a copy of your driver’s license, bank statements for the last 2 months (showing you have the amount of money required to close on the loan), proof of income (pay stubs for the previous 30 days and W2 and tax returns for the previous 2 years, if you are not self-employed; tax returns for the previous 2 years and a year-to-date profit and loss, if you’re self-employed).

Renovation Loan Comparison


FHA 203K

Fannie Mae
Mae HomeStyle®
Property Type Purchase and renovate most residential properties
1-4 Unit Primary
× × × ×
1-Unit Second Home × ×
1-Unit Investment
× ×
Minimum Down
of purchase price
plus total renovation amount.

3% – 1 Unit Property Residence
15% – 2 Unit Primary Residence
25% – 3 or 4 Unit Primary Residence

10% – 1 Unit Second Home
15% – 1 Unit Investor
Appraisal Value based on completed repairs. Appraisal to be market “Subject To”.
Repairs can include any Appraiser identified items. Utilities should be turned on.
maximum as long as mortgage amounts are within county guidelines for
FHA loans.
to $35,000
(including fees & contingency reserve)
75% of the as
completed value
75% of the as
completed value, up to $50,000 (including fees & contingency
From complete rehab
including structural charges, new appliances,
& more.
Flooring to painting,
remodeling kitchen/bath, appliances, & more.
No major remodeling or structural repairs.
Repairs must be affixed and
add value to the property.
Luxury items (though luxury materials for not-luxury items, such as marble bathroom floors, are allowed.
additions, major repairs, landscaping, site amenities, uninhabitable
homes, luxury items.
Repairs must be affixed and
add value to the property.
Mortgage Insurance Less than 80% LTV
transactions require Mortgage Insurance and are subject to MI Company guidelines.
Regardless of down payment amount, Mortgage Insurance is required (currently 0.85% / year for LTV’s of 95%+; 0.80% / year for LTV’s under 95%).