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Renovation Loans: A Comprehensive Guide for Buyers and Homeowners

Renovation loans offer a powerful solution for homebuyers and homeowners looking to purchase or refinance a property in need of upgrades or repairs. While these loans come with additional steps compared to traditional mortgages, they also provide flexibility and opportunity—especially in today’s competitive housing market.

What Is a Renovation Loan?

A renovation loan is a mortgage that includes both the cost of the property and the cost of renovations. Whether you're buying a fixer-upper or refinancing your current home to improve it, renovation loans can be structured to meet your goals. All five major lending agencies—FHA, VA, USDA, Fannie Mae, and Freddie Mac—offer at least one renovation loan option. Many offer both a “light” version for simpler projects and a more in-depth version for extensive work.

Purchase vs. Refinance

Renovation loans can be used for both purchase and refinance transactions. Everything you know about a standard mortgage still applies—the same credit and income guidelines, property requirements, and underwriting processes—but with a few added layers.

Loan Timelines and Approval Process

While a typical loan may close in two weeks, renovation loans generally take around six weeks due to the additional steps. That said, with a responsive and experienced contractor, closing in three weeks is still possible.

There are three primary approvals needed:

1. Client's credit profile

2. Property eligibility

3. Contractor and renovation bids

The bids must be submitted to an appraiser, who will calculate the future value of the home. Fortunately, future value is typically treated with flexibility and rarely presents issues. For instance, FHA loans allow up to 110% loan-to-value (LTV) of the future appraised value—a unique feature worth noting.

Eligible Properties

• Fannie Mae and Freddie Mac: Allow renovation loans for investment properties, but only on single-family homes.

• Multifamily properties: Allowed if owner-occupied, under both FHA and the conventional agencies.

Down Payment Requirements

Down payments are calculated as a percentage of the total project cost, not just the purchase price. That includes:

• Purchase price

• Renovation costs

• A required contingency reserve, usually 10%

For example, $100,000 in renovations will typically require an added $10,000 contingency.

Typical down payment requirements:

• FHA: 3.5%

• Conventional: 5%

• VA/USDA: 0% (if eligible)

Renovation Loan Limits

There’s no true minimum loan amount, but due to the time and effort involved, it's generally not worthwhile for small projects under $10,000–$15,000. Rates typically increase by about 0.25%, so for minor repairs, a cash-out refinance or personal funds might be more efficient.

Loan maximums:

• FHA: Up to FHA loan limits (currently a little over $600,000 in SL and Utah Counties)

• Fannie Mae/Freddie Mac: Up to conforming limits (currently a little over $800,000)

• VA: Renovation assistance typically maxes out at $50,000

Luxury Items and Restrictions

• FHA: No luxury upgrades allowed (e.g., pools).

• Fannie Mae/Freddie Mac: Allow luxury improvements, depending on the appraiser’s valuation and the overall loan structure.

Final Thoughts

Renovation loans are an excellent way to create value, customize a property, or make necessary repairs—without draining savings. As always, choosing the right program depends on your goals, property type, and financial profile. Having a great contractor and an experienced loan officer makes all the difference.