How To Pay For Home Renovations

Home renovations are something that many long-term homeowners can’t evade, after a time, homes will need major maintenance and updating.  Don’t let the costs of such tasks make you feel overwhelmed, there are several mortgage options and mortgage loans that you can request to help pay for home renovations.

There are two main options: you can select a government-backed home renovation loan or a private home renovation loan. In this article we will review each one and you can determine which is your best option.


Fannie Mae HomeStyle Loan

The HomeStyle Loan backed by Fannie Mae is a loan that can be used to buy or refinance a property in order to pay for home improvements. This loan wraps a home mortgage loan and a construction loan into one singular loan (and payment!).

The funds meant for home improvements (not the purchase) is placed into an escrow account to make payments directly to the contractor. The loan can also be granted in 15- or 30-year terms and lends up to $417,000. All home improvements must be completed by professionals and within 12 months from the date the loan was approved. With this loan borrowers can cover the cost of renovation including the labor of construction workers, materials, architects, licenses, and a reserve of 10% for unexpected things.

There are a few qualifications a borrower must meet in order to apply for the Fannie Mae HomeStyle Loan:

  • A minimum credit score of 620.
  • The borrower must have a down payment of at least 5%.
  • Work must be completed by a certified/licensed contractor.
  • A Detailed cost estimate for work to be done must be submitted prior to loan approval.

FHA 203 (k) Loan

This is a federal loan provided by the Federal Housing Administration that allows borrowers with a credit score of 580 or better to repair, improve, or modify their home. There are two types of FHA 203(k) loans – Limited (or streamlined) and Standard. The Limited (Streamlined) FHA 203(k) loan can only be used for cosmetic repairs and improvements and the borrowing limit is capped at $35,000. The Standard FHA 203(k) loan is available for more extensive renovation projects. The Standard FHA 203(k) loan requires that a consultant be assigned to oversee the completion of all repairs.


Home Equity Loan

A Home Equity Loan is also commonly referred to as a “second mortgage”. When you have paid off a substantial amount of you mortgage (at least 20%), this loan borrows back what you have paid into your home. Like your current mortgage, the home is considered collateral for this loan. If you fail to keep up with either your regular mortgage payment or your second mortgage (the Home Equity Loan), then you will be at risk for foreclosure.

A Home Equity Loan is also a one-time loan, meaning once you apply and receive a Home Equity Loan, you cannot do so again with the same home. The benefits are that the loan has a fixed interest rate and fixed monthly payments, so you can plan accordingly with your budget for repayment. With a Home Equity Loan, the funds are given to you and not put into an escrow. The funds can be used for cosmetic repairs, updating the look of your home, pool additions, or other home renovation projects.

Home Equity Line of Credit (HELOC)

A Home Equity Line of Credit is similar to a Home Equity Loan. When you have paid off a portion of your current mortgage (minimum of 20%), you can borrow up to the difference between what you owe and the original loan amount. The home remains collateral. A HELOC loan is not a one-time loan option, it is a line of credit. As you repay what you borrowed (again), you can continue to borrow and borrow again. So long as you are able to keep up with your current mortgage and your HELOC payments, you can continue to use the line of credit to complete home repairs. This option is preferred for homeowners that need extensive work done and their payments to their contractor are split up over time.

Refinancing or “Cash-Out Mortgage”

A Cash-Out Mortgage is a refinancing method to fund home repairs. You refinance your home – but instead of refinancing what you still owe for better terms, you refinance for a large loan amount. The difference between what you owe and the new mortgage amount is paid out to you in cash – which can them be used for home renovations.

This loan also uses your home as a collateral and for those with at least 20% of equity in their home, it can be a better option if the current mortgage rates are better now than they were when you first got your loan. So, you can benefit from the improved rates and still having only one mortgage payment

Unsecured Private Loan

If you do not have enough equity in your home or do not want your home to be collateral for a second loan, then an unsecured private loan may be the preferred option for you. With unsecured private loan, your credit, work history, debt-to-income ratio, and other factors will contribute to how much you will be approved for and at what interest rate. An unsecured private loan works much like applying for a credit card – it is not a guarantee. Private loans differ from unsecured credit cards in that they do not have a revolving balance. One you borrow, you cannot reborrow against the same loan.