How does a renovation loan work?
A renovation loan combines the cost of a home and the cost of repairs into one mortgage. The loan amount is based on what the home should be worth once the work is done. At closing the repair money is set aside, and the contractor is paid in stages as the work is completed and inspected.
The process starts with a plan. You choose a contractor, who writes up a detailed bid. An appraiser then estimates the value of the home as if the work were finished.
After closing, the contractor begins. Funds are released in draws. Before each draw is paid, the completed work is inspected. On larger projects a consultant oversees the plan and the inspections.
The two most common programs are the FHA 203(k) and the Fannie Mae HomeStyle Renovation loan. They differ in the credit they ask for, the property types they allow and the kinds of improvements that qualify.
Related questions
What happens if the repairs cost more than planned?
Renovation loans normally include a contingency reserve for surprises. If it is not used, it is typically applied to the loan balance.
Can I live in the house during the work?
Often, if the home is livable. If it is not, some programs let you finance a few months of housing costs while the work is done.
Can I use a renovation loan on a home I already own?
Yes. A renovation loan can be a refinance that pays off your current mortgage and funds the improvements.
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