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Marco Montano NMLS 404303 VP - Renovation Lending
Renovation Loans Made Simple!
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What is a Renovation Loan?
A renovation loan is a type of financing that combines the cost of purchasing (or refinancing) a home with the funds needed to repair, upgrade, or remodel it—all in one mortgage.
Instead of taking out separate loans for buying and renovating, a renovation loan lets you finance both in a single package, often with one monthly payment and one closing.
Purpose of a Renovation Loan
Renovation loans are designed for:
- Homebuyers purchasing a property that needs repairs or upgrades.
- Homeowners who want to refinance and roll renovation costs into their existing mortgage.
- Investors or owner-occupants seeking to improve property value through remodeling, energy-efficient upgrades, or structural repairs.
- Type of Renovation Loans
- FHA 203K Limited for owner-occupied
- FHA 203K Standard for owner-occupied
- VA Renovation for owner-occupied
- Conventional Renovation for owner-occupied, 2nd homes, and Investment properties.
What is a 203K Loan?
HUD backs an FHA 203k Loan, providing a way for home buyers and homeowners to borrow sufficient funds to buy/refinance a home in almost any condition, incorporating all renovation funds into a single purchase/refinance loan. The repairs are completed after you close on your loan, and the funds are escrowed and paid in draws to the contractor you choose to work with. HUD provides two programs, an FHA 203K Limited and 203K Standard.
The 203k Limited
For minor or non-structural repairs and cosmetic improvements.
Key features:
- Maximum repair amount: $75,000 total (including contingency, fees, and permits).
- No structural work (no load-bearing wall changes, room additions, or foundation work).
- No HUD consultant required, though some lenders may still recommend one.
- Best for: Buyers or owners doing minor, cosmetic renovations or updates.
- Eligible repairs: Non-structural only — things like:
Interior improvements:
- Kitchen or bathroom remodels (no moving load-bearing walls)
- New flooring, carpet, or tile
- Painting (interior and exterior)
- Replacement of doors, windows, and trim
- Energy-efficient upgrades (insulation, thermostats, etc.)
Exterior & curb appeal:
- Roof repairs or replacement (if not structural)
- Gutter and downspout replacement
- Decks, patios, or porches (repair or replace existing, not add new)
- Siding repair or replacement
- Driveway or walkway repairs
Systems & safety:
- Plumbing, electrical, or HVAC upgrades or repairs
- Lead-based paint stabilization
- Septic system or well repair
- Smoke detectors and carbon monoxide systems
Accessibility improvements:
- Modifications for accessibility (ramps, grab bars, etc.)
- Appliances: Purchase and installation of new appliances (stove, refrigerator, washer/dryer, etc.)
The 203k Standard
The FHA 203(k) Standard loan allows for major renovations and structural repairs — basically anything that makes a property safe, livable, and up to FHA standards. Unlike the Limited version (which caps repairs at $75,000 and prohibits structural work), the Standard 203(k) can include extensive remodeling and reconstruction.
Here are examples of repairs and improvements allowed under the 203(k) Standard program:
Here are examples of repairs and improvements allowed under the 203(k) Standard program:
Structural & Major Repairs
- Foundation repairs or replacement
- Major structural alterations (adding or removing load-bearing walls)
- Full home reconstruction (as long as original foundation remains)
- Repairs to termite or moisture-damaged framing
- Raising the house to avoid flooding
Additions & Expansions
- Room additions (e.g., adding a bedroom, bathroom, or family room)
- Expanding the kitchen or living space
- Adding a second story or garage
- Converting basements or attics into living areas
Systems Upgrades
- Complete electrical rewiring
- Plumbing and sewer system replacement
- HVAC installation or major repairs (heating and cooling)
- Septic system or well replacement
Exterior Improvements
- New roofing, siding, gutters, and downspouts
- Structural deck or porch construction
- Foundation waterproofing
- Driveway or walkway replacement (if necessary for access/safety)
Interior Renovations
- Full kitchen and bathroom remodels
- Flooring, drywall, and insulation replacement
- Painting, cabinetry, and built-in furniture
- Accessibility improvements (ramps, wider doors, etc.)
Energy Efficiency & Safety
- Energy-efficient windows and doors
- Solar panels or other renewable systems
- Lead-based paint abatement
- Radon mitigation, asbestos removal
- Smoke and carbon monoxide detectors
Not Allowed
The 203(k) Standard cannot be used for:
- Luxury items (new swimming pools (you can repair an exciting pool), outdoor kitchens, tennis courts)
- Landscaping for aesthetic purposes only
- Minor repairs that don’t meet the minimum $5,000 requirement
How does the 110% formula for fha 203k loans work?
110% formula explained
When you use an FHA 203(k) loan, the lender needs to know how much the property will be worth after renovations — called the “after-improved value.”
The maximum loan amount is based on the lesser of these two numbers:
- (Purchase price + total renovation costs)
- 110% of the after-improved appraised value
Then, that number is multiplied by 96.5% (the maximum FHA loan-to-value ratio).
Formula
Max Loan Amount = 96.5% × min [(Purchase Price + Renovation Costs), 110%× (After-Improved Value)
Example
Let’s say:
- Purchase price = $250,000
- Renovation costs = $50,000
- After-improved appraised value = $280,000
Now calculate both options:
- Purchase + Renovation = $300,000
- 110% of After-Improved Value = 1.10 × $280,000 = $308,000
Take the lesser → $300,000
Then apply FHA’s 96.5% LTV:
96.5% × 300,000 = $289,500 max loan amount
Why 110%?
The 110% rule is a key feature of the FHA 203 (k) loan process. It allows borrowers to receive credit for the future value their renovations will create, providing flexibility. This rule ensures that the property's potential higher appraisal value is considered, while also managing FHA’s risk by capping it at 110% of the improved value.
the va renovation program
A VA Renovation Loan, also known as a VA Rehab Loan, is a mortgage program backed by the U.S. Department of Veterans Affairs. It allows eligible veterans, active-duty service members, and certain surviving spouses to purchase and renovate a home with a single loan.
This program provides up to $75,000 for approved renovation costs, and all work must be completed within 90 days of closing. The loan is intended for non-structural and cosmetic improvements, such as flooring, painting, kitchen or bathroom updates, and energy-efficient upgrades, rather than major structural or foundation repairs.
Here’s how it works:
- You can purchase or refinance a home and include up to $75,000 for approved renovation costs.
- The repairs must be completed within 90 days after closing.
- The loan is designed for non-structural and cosmetic improvements, such as:
- New flooring or paint
- Kitchen and bathroom updates
- Roof or HVAC repairs
- Energy efficiency upgrades
- ADA upgrades such as ramp going into the home, wider doors, lower cabinets, walk-in bathtubs, and much more
- Interior and exterior painting services
- Roof repair or replacement
- Window and door replacement
- Energy-efficiency improvements (insulation, new windows, etc.)
- Accessibility upgrades (ramps, grab bars, etc.)
- Deck, patio, or porch repair
- Minor landscaping to restore or maintain safety and functionality
Ineligible Repairs (Not Allowed)
These involve structural or major foundation work or anything that changes the home’s footprint or load-bearing systems:
- Foundation repairs or replacements
- Room additions or expanding square footage
- Major structural framing changes
- Load-bearing wall removal or modification
- Complete rebuilds or teardowns
- New construction projects
- Luxury items (pools, hot tubs, outdoor kitchens, etc.)
the conventional renovation program
The conventional renovation program(s)
A conventional renovation loan is a type of mortgage that allows you to purchase or refinance a home and include the cost of renovations or repairs in a single loan. Unlike government-backed programs (like the FHA 203(k) or VA Renovation Loan), a conventional renovation loan is backed by Fannie Mae or Freddie Mac, not a federal agency.
There are two main types of conventional renovation loans:
Comparing the Programs
Fannie Mae HomeStyle® Renovation Loan
Overview:
- Allows financing for a primary residence, second home, or investment property.
- Funds can be usering the Programs:d for repairs, updates, or major renovations, including structural changes and luxury upgrades (like pools or landscaping).
- The renovation costs can total up to 75% of the home’s “as-completed” value (after improvements).
Key Features:
- One loan for both purchase (or refinance) and renovation.
- Owner-occupied, second homes, and investment properties eligible.
- Down payment: as low as 3% for first-time buyers (if HomeReady® qualified).
- A licensed contractor must complete renovation work.
Freddie Mac CHOICERenovation® Loan
Overview:
- Similar to HomeStyle but with a few unique flexibilities.
- It can also be used for disaster repairs, accessibility improvements, or resiliency upgrades (like flood or storm-proofing).
- Renovation costs can also reach up to 75% of the as-completed value.
Key Features:
- Can be used for primary, secondary, or investment properties.
- Down payments as low as 3% for qualified buyers.
- Borrowers can finance resiliency upgrades (e.g., installing a backup generator or storm shelter).
Allowable Repairs on the Conventional Renovation Programs: Structural Repairs
- Foundation repair or replacement
- Framing, walls, beams, and columns
- Roof replacement or structural roof work
- Load-bearing wall modifications or additions
- Room additions or garage additions
Interior & Exterior Renovations
- Kitchen and bathroom remodels
- Flooring (tile, wood, carpet, etc.)
- Painting (interior and exterior)
- Windows and doors replacement
- Drywall, insulation, and trim work
Major Systems
- Plumbing, electrical, and HVAC replacement or upgrades
- Septic system or well repair/replacement
- Energy efficiency improvements (solar panels, insulation, windows, etc.)
Accessibility and Safety
- Accessibility upgrades (ramps, wider doors, grab bars, etc.)
- Lead-based paint remediation
- Mold, pest, or termite treatment
- Smoke and carbon monoxide detectors installation
Exterior & Site Improvements
- Landscaping (if it adds value or supports property's function)
- Driveways, walkways, and fencing
- Decks, patios, porches
- Retaining walls and grading (for drainage or safety reasons)
Luxury or Nonessential Items (Allowed with Limits)
Fannie Mae and Freddie Mac do allow certain luxury improvements, as long as they are permanently affixed and increase property value:
- In-ground swimming pools
- Outdoor kitchens
- Built-in appliances and cabinetry
- Detached garage or accessory dwelling unit (ADU)
Additional Notes
- DIY work is not allowed; a licensed contractor must complete all renovations.
- Renovations must be completed within 12 months after closing.
- Repairs must be supported by a contractor bid and appraisal "as-completed" value.
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First Community Mortgage
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