Can Renovation Loans be Built Into Your Mortgage?

When it comes to home renovation, one thing that bothers many homeowners is whether they can include renovation costs in a mortgage loan. Can you include renovation costs in a mortgage? This is one of the most critical questions for homebuyers. For most, buying a home means taking a conventional loan. It enables them to shift to a new home, and that’s the beginning of their dream story. However, if you want to buy a place that needs renovation, you can do so with a real estate rehab loan.

Home reno loan will require you to hire a licensed contractor. These loans have certain advantages, but since most borrowers are uncomfortable with the project scope and are confused about their affordability, they do not consider buying a home that needs renovation. 

So, to return to the question, “Can you include renovation costs in a mortgage?” The answer is ‘yes.’ Read the complete article to know all about real estate rehab loans.

Benefits of Home Reno Loans

One of the biggest benefits of a home mortgage with a renovation loan is that you get the money to finance the project while it becomes a part of your monthly mortgage payment. If you put the property up for sale, you will have to pay additionally based on the as-completed value of the home. 

Home Reno Loan Types 

Whether you want to strip the existing down to the frame, gut it, and renovate it extensively or need money for minor improvements, you must choose the mortgage that includes the renovation costs. What factors should you consider? These include your earnings, credit score, qualifying for eligibility criteria, down payment requirements, and many more. 

You can choose between a conventional mortgage plus improvements and Federal government-backed loans like FHA, VA, etc.

1. FHA 203(k)

FHA 203(K) include renovations in mortgage and are used by borrowers to buy “handyperson special” that need to be refurbished or upgraded. You can hire a licensed professional or renovate independently, but it gives you the necessary funds to become a homeowner while completing the renovations.

There are two types home reno loans to choose from - Standard 203(k) and Limited 203(k). 

• Standard 203(k)

Under this loan, major repairs are covered for a place that will be your primary residence. For example, this loan type can cover properties that are damaged due to natural disasters like floods or fires. If the property has structural integrity or foundation issues, this is the one to go for; it is a mortgage includes renovation costs. Other than that, the loan includes floor repairs and room additions.  

The funding starts at $5,000; the loan can cover purchase or renovation costs, whichever is less.

• Limited 203(k)

This type of mortgage plus improvements is also known as streamline. This real estate rehab loan fund is offered up to $35,000, covering not-so-extensive repairs or cosmetic improvements like the replacement of obsolete appliances or updating the kitchen or the bathroom. 

Benefits of FHA 203(k)

• Two loan options for borrowers to choose from.

• Down payment requirements are pretty low.

• The loan covers funds for buying a home, renovating, and refinancing.

Disadvantages of  FHA 203(k)

• Approval is required for all kinds of upgrades.

• If you plan to buy a ready-to-move-in property, this mortgage plus improvements is not the right choice.

• Only borrowers for single-family residences are eligible.

2. Fannie Mae HomeStyle 

The answer to the question, ‘Can you use a mortgage to renovate?’ lies with the loan offered by the Federal National Mortgage Association (Fannie Mae). This is called the HomeStyle Renovation Mortgage. There are two variations - as a fixed-mortgage option or as an adjustable-rate mortgage (ARM) option. The eligibility criteria for this real estate rehab loan are - such borrowers cannot pay more than 75% of the appraised value of the property. If you are considering refinancing, you will not be allowed to go beyond 75% of the property’s value as completed appraised.

Benefits - 

• Fixed mortgage and ARM mortgage options are available.

• The funds can be combined with other funding offered by Fannie Mae Products.

• Provision of repairs is included.

Disadvantages of Fannie Mae HomeStyle

• Documentation work is lengthy.

• You can use the funds to rebuild the home. 

• The project must be finished within the promised time.

3. Freddie Mac Renovation Mortgage

The third type of mortgage that includes the renovation costs is the Freddie Mac Renovation Mortgage. This loan can be used to renovate multiple-unit dwellings or a single-family home, second-home renovations, or a property purchased for investment. It is available as fixed-rate or ARM loans. The loan term usually ranges from 15 to 30 years. Borrowers can make less than 20% down payment for single-family homes, while the rates are higher for multi-units.

Qualification criteria of this home renovation loan usually include credit scores, debt-to-income ratios, and others.

Benefits 

• The down payment is comparatively lesser.

• Credit requirements are comparatively less strict.

• It can be used for single-family homes or multiple-unit properties.

• Applicable for investment and second properties.

Disadvantages of Freddie Mac Renovation Mortgage

• If you are the borrower, you cannot have any relationship or professional affiliation with the builder, seller, or developer.

• This home mortgage with a renovation loan is not applicable for manufactured homes.

4. Jumbo Loan Renovation Mortgage

If you want to buy an expensive property or a bigger home that exceeds the loan limits mentioned by the 2022 Federal Housing Finance Agency (FHFA), you can go for a Jumbo Renovation Loan.  

Renovation needs to be non-structural but can be significant, like overhauling the kitchen or the bathroom, adding pools and patios, etc. The eligibility criteria will include a thorough check of the credit, DTI ratios, income, etc.

Benefits 

• Best 0suited for larger homes.

• Additional funds are provided for cosmetic improvements.

Cons 

• The renovation cost cannot be more than 30% of the completed costs.

• Structural renovations or tear-downs are not included.

• Applicable only for single-family homes.

 

Include Renovation in the Mortgage with Total Mortgage!

If you want to include renovation in the mortgage, contact a leading mortgage platform, Total Mortgage. The team will support and assist you in choosing the best deal to generate maximum financial viability.