Home Renovation Loans – An Overview

Updated: Apr 1, 2020

Scale balancing renovation costs and the renovations  scope of work

Why Affording A Renovation Can Be Challenging

The biggest hurdle in a renovation for most homeowners and buyers is the cost. According to Houzz, about 60% were waiting for the financial means to start their projects. Additionally, 85% of homeowners use cash from their savings to fund renovations.

In 2018, the U.S. Census data stated the average total household income was $61,937. When you factor in living expenses, it’s not easy for most people to afford major kitchen and bath renovations. These projects can easily reach costs of $50,000. It takes years to save up for a home renovation!

The National Association of Realtors reports the average American moves on average every 8 years. Homeowners are leaving money on the table! Not to mention missing the opportunity to enjoy their home along the way. I have seen far too many homeowners renovate immediately before they sell to better position their property. That’s great news for the buyer, but what about the seller’s opportunity to enjoy the home?

This is unfortunate, especially when there are smart options to finance a project. Unlike the car sitting in your driveway, your home can be an investment! You just need to plan wisely and know how and where to leverage your money.

Give Your Dollars A Job With Creative Financing

According to LendingTree statistics, Americans borrow on average $32,480 for a new vehicle and the average monthly car payment is $550 and $452 for a lease. You might be asking yourself, “Why are we discussing auto loans when we should be talking about home renovations?” Statistics show the majority of Americans are buying & leasing cars… their second largest purchase and they are using financing, not cash! Today, Americans have as much as $1.2 trillion in auto loan debt!

Put your hard-earned dollars to work and leverage them with a renovation loan to increase your home’s value! For example, with today’s 30-year fixed rate mortgage loan you can leverage the same $500 per month car payment for $115,616 with as little as a 3% down payment ($3,468) towards a home. Multiply that by 2x if you’re an average American family with 2 car payments!

Mortgage calculator results for a renovation loan

(Google mortgage calculator)

Using the same financial leverage, you can finish your home renovation sooner than you think!

Buy / Refinance & Renovate With One Mortgage Loan

Whether you’re house hunting or already own a home, you can take advantage of a home renovation mortgage loan. Currently there are two options; the Fannie Mae HomeStyle or the FHA 203(k) loan. Each have their pros and cons, but they essentially lend you money, based on the after-repair value (ARV) of your home.

One of the great advantages of using this type of loan is being able to leverage the future value of your home. In contrast, an equity loan or personal loan is limited to your current available credit. This gives you a great amount of financial leverage and you have the opportunity to be creative and force appreciation & home equity if you plan wisely!

To start, the HomeStyle loan is guaranteed by Fannie Mae and the FHA 203(k) loan is insured by the Federal Housing Administration (FHA).The 203(k) loan is typically more flexible with the borrower’s credit, but pickier about what renovation work can be done. In contrast, the HomeStyle loan is the opposite, with higher credit requirements and more flexibility on what work can be done.

  • The 203(k) loan will typically qualify borrowers with a 500 credit score and a minimum 3.5% down payment, but limits the scope of work by what the FHA deems “luxuries” (i.e. Swimming Pools, Patios, Fire Pits, Tennis Courts, Gazebos and other items). The FHA does not provide a definitive list of “luxury items” but they can vary depending on your city, state and code requirements. It is best to discuss your options with your mortgage lender. The 203(k) can only be used for a primary residence (Single-family, condo, 1-4 unit structure or a qualified manufactured home). It cannot be used for a vacation or investment property.

  • The HomeStyle loan typically requires a 620 credit score and a 3% to 5% minimum down payment depending on how you qualify. Restrictions typically require improvements to be permanently affixed to the dwelling or land. Items like swimming pools, decks and patios can qualify. It’s always best to discuss your options with your mortgage lender. HomeStyle loans can also be used for renovating a second home or investment property up to 4 units.

Your Renovation Team

These loans normally require a licensed HUD Consultant (Federal Dept. of Housing &

Urban Development) to be hired if the project exceeds $35,000 and / or requires structural work. This will add cost to your project. Ask what their fee structure is before you hire. I typically see $1,000 - $1,500 on projects here in New Jersey.

paper cut-out of multiple people and team

The job of the HUD consultant is to ensure federal guidelines are met to protect the homeowner and lender by providing their expertise as the “Project Leader”. They provide project feasibility reports, review architectural drawings (if provided), review contractor quotes, prepare change orders, complete draw inspections and insure the home is safe and healthy for occupancy.


HUD consultants can be an asset to your renovation but not all HUD consultants are created equal. In my experience, the quality of the consultant depends on their background and how they run their operation.

HUD requires consultants to have 3+ year’s experience as a licensed home inspector, or general contractor to apply for a HUD license. They can also be either an engineer or architect and omit the 3-year minimum requirement. This means your consultant typically has one of these backgrounds and they all have their own benefits and disadvantages.

In my experience most of them have backgrounds as a home inspector or a contractor. For some, the HUD license is just a way to supplement their existing business. It’s imperative that you get feedback from their previous clients.

Before You Start Tips & Tricks

I have experience both professionally and personally with the 203(k) and HomeStyle

loans and I highly recommend you look into them for your project. Here are some helpful pointers that can make the process a lot smoother:

Home renovation loan tips and tricks
  • Finding a lender who offers renovation loans is not as easy ask walking into your bank. Not all banks/lenders offer renovation loans and it will require you to do a little searching. Instead of calling every bank/lender on your Google search, I suggest visiting the Dept. of Housing & Urban Development website HERE and use their search tool.

You can look up registered HUD Consultants in your state. Reach out to a few and ask them what lenders they work with. HUD consultants typically work with many 203k and HomeStyle lenders.

(Just enter your state and click send. You can filter by city on the list provided)

HUD 203k Consultant search tool
  • Vet your lender. Ask lenders for references! Don’t just compare rates, ask about their renovation loan experience. You must look at these loans as “products” and the lenders are selling them. How do they stand behind their product, and what do they offer you in terms of service and guarantees?

Ask the references what they experienced especially after closing! Typically, renovation loans are sent to a different department or a third-party project management company to oversee the renovation. Subsequently, the service may differ from the experience you had with the loan officer and / or broker.

  • Vet the HUD Consultants your lender works with. Try to get at least 3 references from clients who completed a renovation loan with them. Ask how long they have been a HUD consultant and about their previous experience as a contractor, home inspector etc.

Ask if they are a full-time HUD Consultant or if they have another business or company they work for (i.e home inspector). If they do, look them up for reviews and make sure they have a good reputation. Remember, the HUD consultant acts as the project manager / gate keeper…if the consultant is problematic your project will be too! Ideally your consultant will be a full-time owner AND operator of his or her business. Don’t hire an absentee consultant who isn’t actively on your jobsite!

  • Licensed and insured contractors are necessary with these loans. The lender and / or HUD Consultant cannot legally dictate who you hire, as long as the contractor is licensed, insured, and is in good standing. If your lender has an “approved list”, it’s typically filled with contractors who have worked with their clients on previous jobs. Make sure your contractor is experienced with these loans!

The FHA 203(k) loan does not provide any deposit or upfront money to contractors! Draws are only disbursed after work is complete. Additionally, the lender holds back 10% on all draws until the project is 100% complete with permits. This can be a major deal breaker for most contractors as they must absorb all costs prior to completed work. Be fully transparent with them from the beginning.

The HomeStyle loan does provide “up to 50% of the material costs” on draw #1, but in my experience this number can fluctuate drastically depending on the discretion of the lender and HUD consultant.

Don’t let the renovation loan intimidate you! Yes, there is a little more paperwork and yes it can be a challenge at times. In the end, you will have a newly renovated house that is truly yours to call home! If you have any questions or would like us to help you on your project, click HERE to contact us and learn more about our services.
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