Renovation Loans

Renovation loans, also referred to as home improvement loans or FHA 203(k) loans, provide homeowners with the financial assistance needed to cover the cost of equipment and labor associated with home repairs and renovation. These loans allow you to borrow money against the current equity of your property to be used for improvements and repairs, and are typically offered in a single closing, with the amount borrowed usually being based on the completed value of the property. In addition to being able to borrow against the equity of your home, renovation loans also provide the advantage of being able to generate additional equity by adding square footage to the property. While most renovation loans only require a single closing, in many cases the lender will continue to gradually supply funds to the contractor responsible for the renovations at the project is completed. The following paragraphs explain the conditions and types of renovation loans, as well as what they can be used for.

What Can Renovation Loans Be Used for?
Renovation loans can be used to pay for any type of repairs, renovations, remodeling, and expansion on your property. This may include but is not limited to replacing the roof, windows, siding, gutters, walls, and flooring. You may also use renovation loans to expand existing areas of the home or add additional rooms, as well as improving landscaping and exterior aesthetic aspects of the property. Some homeowners have even used renovation loans to add safety ramps and simplify accessibility for individuals with disabilities. The loan could also be used to finish or expand decks, patios, basements, and attics. Depending on the zoning laws of your district you may be able to use a renovation loan to create additional units within your property, which can be rented to tenants for a monthly profit. Finally, many homeowners have used these loans to add or repair swimming pools and even hot tubs.

Types of Renovation Loans
There are two main types of relational loans – purchase renovation loans and refinance renovation loans. A purchase renovation loan, also commonly referred to as a rehab loan is ideal for prospective homebuyers that would like to begin renovating the property immediately after purchasing it. This type of loan basically provides financing for both the purchase of the property and renovation, and usually acquires a minimum down payment of about 3 to 5% of completed property value. A refinance renovation loan, also commonly referred to as a rehab loan, is suitable for someone that already owns their property and would like to perform any of the aforementioned renovations. A refinance loan provides financing to pay off the remainder of any existing financing (such as the original mortgage), while also providing additional funds to cover the renovations. Depending on your credit score and your eligibility you may be able to borrow up to 100% of the completed property value.

Conditions of Renovation Loans
With most renovation loans the borrower has up to six months to ensure that the repairs and renovations are completed, after which funding from the loan will cease. Renovation loans are known for having qualification requirements that are less strict than typical home loans. While funds are sometimes supplied directly to the contractor or homeowner incrementally, the loan typically closes before a project begins. If you are purchasing a property that is in need of repairs it may be possible to obtain financing in the form of a home loan that covers both the cost of the property purchase and repairs. An FHA 203(k) loans can have a maximum amount that is equal to the allowable loan amount within a district, which means that even homeowners that live in upper-class areas can obtain adequate financing.