A renovation loan, also called a remodel loan, is one mortgage that pays for a home and the work it needs, or, on a home you already own, refinances what you owe and adds the cost of the repairs or the remodel. The appraiser values the home as it will be with the work finished, and the money for the work sits in an escrow account and is paid out in draws as the work is done and checked. For a house in San Luis Obispo County that needs work, we arrange renovation loans, FHA's 203(k), Fannie Mae's HomeStyle Renovation and Freddie Mac's CHOICERenovation among them. It can cost more than a plain mortgage and it asks more of you. Among the risks, the work can run over its budget or past its deadline, and the finished home can appraise for less than the plan assumed.
What a lender weighs before this program is on the table. A lender can add rules of its own, and those rules can differ from one lender to the next.
FHA's 203(k) is for a home you will live in, from one to four units, and it can also renovate the inside of an eligible condominium unit; FHA does not insure one on an investment property, except for HUD-approved nonprofits and government agencies. Fannie Mae's HomeStyle Renovation and Freddie Mac's CHOICERenovation can also finance a second home or an investment property with one unit, within each program's rules, and a condominium or planned development unit when the association's rules allow the work. On a HomeStyle loan, work on a condominium stays inside the unit. Each starts from a home that exists: neither conventional program pays to demolish a house and build a new one, and FHA's Standard 203(k) can rebuild only on the foundation that is there.
The lender documents and verifies your income, assets and credit, and the credit rules are FHA's, Fannie Mae's or Freddie Mac's own. Expect to provide records such as pay stubs, tax returns and bank statements. On a CHOICERenovation loan, if you will rent somewhere else while the work is done, Freddie Mac's rules can require that rent to be counted with your other debts.
The lender reviews the job as well as you, before closing. You choose the contractor, licensed where the law requires it, and on a HomeStyle loan the lender may not choose one for you or steer you to one; the lender checks the contractor's credentials and a signed contract that sets out the work, the price and the schedule. A Standard 203(k) adds an FHA-approved 203(k) Consultant, chosen by the lender, who inspects the home and writes up each item of work and its cost; that inspection is not a home inspection, and the consultant's agreement with you has to say so. A Limited 203(k) needs no consultant but takes only minor, nonstructural work, under a cost cap FHA sets. Bring real bids, not an estimate from a calculator.
The appraiser values the home as it will be once the work is done, working from the plans, the bids or the consultant's write-up, and that value is one of the limits on the loan. If it comes in lower than the plan assumed, the loan can be smaller than the job needs, and if the plans change during the work, the appraiser may have to value the home again. HomeStyle and CHOICERenovation also cap the cost of the work as a share of the value, and the Limited 203(k) has a cost cap of its own, so set the budget against those limits before you commit to a contractor.
A job small enough to pay for from savings may not need a loan at all, a new house on a lot is a construction loan, and a property bought to renovate and resell is what a fix-and-flip loan is for. On a home you own, a renovation loan replaces your first mortgage if you have one, and so does a cash-out refinance: either way, the new loan's rate and terms apply to the whole mortgage balance, not only to the new money. If you have a first mortgage you want to keep, a home equity line of credit (HELOC) leaves it in place, at the cost of a second payment and a rate that can change. Our refinance page sets out what a cash-out refinance does to your balance and your payment, and a second unit on your lot starts on our ADU page.
The steps in order, so you can see what is coming. Nothing here is underwritten until a lender underwrites it.
Whether you are buying or already own it, what it needs, whether you have a contractor and bids yet, and roughly what the job will cost. A written scope of work, even a rough one, makes that first conversation more useful.
The scope of the work, the property and your file decide which program can fit: a Limited 203(k), a Standard 203(k), HomeStyle or CHOICERenovation. If the file supports one, your loan officer can write a pre-qualification.
You sign a contract with your contractor, the plans or the write-up go to the appraiser, who values the home as it will be finished, and the lender reviews the contractor and the budget. On an FHA 203(k) purchase, the sales contract has to say that you have applied for 203(k) financing.
One closing funds the loan, and the money for the work that is not paid at closing goes into an escrow account. It is paid out in draws as the work is done and checked. Before the last of it is paid out, the lender asks for proof the work is finished, along with lien releases or an updated title report.
If yours is not here, call us. The useful answer depends on your file.
A renovation loan, also called a remodel loan, is one mortgage that pays for a home and the work it needs, or refinances a home you already own and adds the cost of the repairs or the remodel. The appraiser values the home as it will be once the work is finished, and the money for the work is held in an escrow account and paid out in draws as the work is done and checked. FHA's 203(k), Fannie Mae's HomeStyle Renovation and Freddie Mac's CHOICERenovation are three programs built this way, and each has its own rules on the property, the contractor and the date the work must be finished by.
A Standard 203(k) can pay for larger remodeling and repairs, structural work included, such as an addition or foundation repair, and it requires an FHA-approved 203(k) Consultant, who inspects the home and writes up the work and its cost. A Limited 203(k) is only for minor remodeling and nonstructural repairs, carries a cap on the total cost of the work that FHA sets, and does not require a consultant. FHA treats work as too major for the Limited version if, among other tests, it is structural, it would keep you out of the home for longer than FHA allows, it would take longer to finish than FHA allows, or the repairs the appraisal requires call for plans or a consultant to specify them.
Yes, the programs allow it, and we arrange renovation refinances. FHA's 203(k) can refinance what you owe on a home you live in and add the cost of the work, and Fannie Mae's HomeStyle Renovation and Freddie Mac's CHOICERenovation can do the same as a refinance that pays for the work rather than handing you cash. The new loan replaces your first mortgage if you have one, and the appraiser's value for the finished home is one of the limits on it. A cash-out refinance also replaces the first mortgage, and it pays the money to you rather than into an escrow account for the work. A HELOC or a home equity loan leaves your first mortgage in place and adds a second payment, and a line's rate can change.
Where the loan has a contingency reserve, that money is set aside for unforeseen costs found during the work, and the program's rules decide when it is released. FHA requires one on a Standard 203(k) in some cases, such as an older house or one with termite damage, Freddie Mac requires one on a CHOICERenovation loan with some exceptions, and Fannie Mae requires one on a HomeStyle loan for a home with two to four units. Past what the reserve covers, plan on paying the difference yourself: on a HomeStyle loan, Fannie Mae's rules say the loan may not be raised to cover a cost increase, and its renovation loan agreement makes overruns and change orders yours to pay. Any change to the plans goes through a written change order that the lender approves first.
Sometimes, with the lender's approval, and none of the programs pays you for your own labor. FHA's 203(k) can allow it when you are a licensed general contractor or can document experience completing renovation projects, among other conditions, and it reimburses materials only. Fannie Mae's HomeStyle allows it on a home with one unit, though not on a manufactured home, for a limited share of the finished value, with the lender approving the work in advance and inspecting the larger items once they are done. Freddie Mac's CHOICERenovation allows it when you are licensed where the law requires, insured and qualified, and it pays for materials but not labor.
Government-insured
Government-insured, with credit score tiers HUD publishes.
Construction and commercial
Pays for building a home on your lot, in draws, then becomes or is replaced by a mortgage.
Home equity
A line of credit secured by your home, or a loan paid in one sum, that sits behind any first mortgage, which stays as it is. The rate on a line can change, and falling behind puts the home at risk.
Where this program fits:Buying a homeRefinancingThe county's loan limitsThe Central CoastServices
Where it comes up in the county:Lompoc
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This page is general information about a loan program, not an offer of credit or a commitment to lend. What a lender will do with your file depends on the file.
Answer a few questions and your loan officer can talk you through which programs could fit your file, including when this one does not.
No credit pull to get started. This is not a commitment to lend. Equal Housing Opportunity.
