These loans allow borrowers to combine remodeling

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Written By KennethChing emerged from a shared vision: to make loan management accessible and understandable for everyone.





You’ve found your dream home but it needs some work. What now?

You might be like many homebuyers today in this high-priced market. Your budget is likely to be stretched just to get the property. You don’t have to do renovations, but there are loan options that allow you to increase your initial mortgage to cover these costs.

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Each type of loan is different and each has its own advantages, drawbacks and limitations. This is how you can choose the right option for your situation.

How to estimate the cost of remodeling or repairs?

Before you talk to lenders about renovator loans, it is important to estimate the cost of your remodel.

Tabitha Mazzara is the director of operations at MBANC. This mortgage lending company is based in California.

Working with an inspector certified by the Department of Housing and Urban Development (known as HUD) is one way to get an estimate of your renovation costs. These HUD-certified inspectors can give you a complete rundown of the work required and the cost.

Add the cost to your mortgage loan

After you have established a budget, you can begin to look at your options for adding this cost to your mortgage. This would mean that the remodeling costs would be added to your original loan amount (the money required to buy the house), creating a new total balance for your mortgage.

FHA 203(k), Loan

FHA 203(k), a government-backed loan, has a few additional rules and requirements than a traditional mortgage. However, it also offers some unique benefits.

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A buyer can take out a 203(k), which allows the majority of the loan to be used for the purchase of the home. The remainder is kept in an escrow account, which releases funds as the renovations are completed.

Fannie Mae Homestyle Loan

Fannie Mae Homestyle loans are another government-backed loan option. Although the basic structure is the same as 203(k), the requirements for the loan are slightly different.

Mazzara states that a Homestyle loan would be more accommodating than the 203(k) because it allows for more flexibility in what improvements it can be used to.

A Homestyle loan is available to purchase investment or vacation properties. A 203(k), however, is only intended for primary residences. Homestyle loans are also available for upgrades such as pools and hot tubs that aren’t eligible for a 203(k).

Freddie Mac Renovation Mortgage (CHOICERenovation Loan and CHOICEReno eXPress).

A Freddie Mac Renovation Mortgage is very similar to a Fannie Mae Homestyle Loan. Freddie Mac is also a government-backed company and offers two types of loan: CHOICERenovation loan or CHOICEReno eXPress.

The CHOICERenovation loan, which is relatively new, offers more flexibility than an FHA 203 (k) loan, and may have lower interest rates depending on your financial situation.

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What Does a Remodel Do to Your Home?

  • These renovation loan options assume that home remodels almost always increase in value.
  • It can be difficult to predict how much a renovation will increase your home’s value. However, there are some types of renovations which provide greater value than others.
  • Kitchens and bathrooms are the most popular areas for homebuyers to remodel. These types of renovations are worth the effort, especially now that appliances and materials are scarce.
  • There are other financing options available for remodeling or repairs
  • You might consider adding costs to your first mortgage if you are determined to tackle your home renovation. There are other financing options available for your project.

Cash-Out Refinance

A cash-out refinance sounds exactly like it does: Refinancing your existing mortgage and converting it to one.

You can extract equity through cash if you have a higher loan amount.

This can be a cost-effective way to access funds, provided you are able to secure a high interest rate. This is a good option if you require a large sum of cash to kickstart your renovations. Cash-out refinances are generally not restricted in what they can be used for. This is a great option if you don’t want the hassle of getting a government-backed loan for home renovations.

Home Equity Lending

There are two types home equity loans: A home equity loan is a lump-sum loan that you take out upfront, and then pay it back over a fixed term like an installment loan. Home equity credit works more like a credit card. You can draw as much or as little from the line of credit as you want (up to your credit limit), and only pay interest for the amount that you use.

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Personal loans

Although personal loans are based on your credit history, they are not usually secured by any kind of property (such as a home). This means that the interest rates are often significantly higher. However, personal loans can be an option for those who are completing minor renovations of less than $10,000. There are very few strings attached.