Renovation loans
Renovation loans — buy the house and the kitchen it needs.
The houses that sit on the market are usually the ones that need something. A dated kitchen, a roof at the end of its life, a bathroom nobody has touched since 1994. Most buyers walk because they cannot pay for the house and the work at the same time. A renovation loan finances both in one mortgage, underwritten on what the house will be worth when the work is done rather than what it is worth today.
There are two families of these. FHA insures the 203(k) — a Limited version for up to $35,000 of non-structural work including a contingency reserve, and a Standard version for larger budgets and structural changes. Conventional renovation financing covers a similar range with the conventional rule set, including on second homes and some investment properties, where FHA will not go.
Updated
Renovation at a glance
- FHA Limited 203(k)
- Up to $35,000, non-structural
- FHA Standard 203(k)
- Larger budgets, structural work allowed
- Conventional renovation
- Primary, second home, some investment
- Appraisal basis
- After-improved value
- Contractor
- Licensed, with bids reviewed up front
- Draws
- Released as inspected work completes
Right for you if
- Buyers competing for houses that need obvious work, where the field thins out
- A dated but structurally sound house in a neighborhood you actually want
- Foreclosures and estate sales that will not pass an as-is appraisal
- Owners who want to renovate without a second lien at second-lien pricing
- Removing a repair condition an FHA or VA appraiser flagged
Know before you commit
- Contractor bids, licensing and a scope of work are part of underwriting
- You cannot do the work yourself on most products, and sweat equity is limited
- Timelines run longer than a straight purchase; plan the contract dates accordingly
- Work begins after closing and funds release in inspected draws, not as a lump sum
- A contingency reserve is required, which is a feature rather than a fee
How after-improved value works
On a normal purchase the appraiser values the house as it stands. On a renovation loan the appraiser is given the plans, the specification and the contractor bid, and values the house as it will be when the work is finished. The loan is then sized against that number. This is why a renovation loan can finance a house whose current condition would not support the total amount being borrowed.
Which product fits which job
| Scenario | Usual answer |
|---|---|
| Kitchen, baths, flooring, paint, appliances, roof repair under $35,000 | FHA Limited 203(k) |
| Moving walls, additions, foundation work, larger budgets | FHA Standard 203(k) |
| Strong credit, wants mortgage insurance to end | Conventional renovation |
| Second home or investment property | Conventional renovation |
| Small cosmetic budget, plenty of cash | Standard purchase, pay for work separately |
General program guidelines. The right answer depends on the scope, your credit profile, the occupancy and whether structural work is involved.
The process, in order
- Pre-approval, with the renovation budget included from the start
- Contractor selected and licensed, with a written bid and scope of work
- Appraisal ordered on an after-improved basis using the plans and bid
- Underwriting reviews you, the contractor and the scope
- Closing, with the renovation funds held in escrow
- Work begins; draws release as inspections confirm completed stages
- Final inspection releases the last draw and the loan behaves like a normal mortgage
The honest comparison against a HELOC
If you already own the house and have equity, a home equity line is often simpler and cheaper for a small project. Renovation financing wins on a purchase, where there is no equity to draw on yet, and on larger scopes where the after-improved value is doing real work. It also wins when the alternative is a second lien at second-lien pricing for the next twenty years.
FHA 203(k) loans are insured by the Federal Housing Administration. Program parameters are set by HUD and subject to change.
In their words
Clients who used renovation
Travis was always there with an answer and guiding me through the whole lending process! Very professional and friendly, feel like I've known him for years...would highly recommend Travis for anyone in the market!!!
Travis is an amazing lender! I always joke I’m going to buy him a cape to wear because he is forever saving a deal!! If you want a lender that’s reliable, PROMPT, knowledgeable and genuinely cares about his customers! I recommend all my buyer clients to Travis!
Questions
Renovation, answered
An FHA Limited 203(k) covers up to $35,000 including a contingency reserve, for non-structural work. A Standard 203(k) and conventional renovation products handle larger budgets and structural changes, sized against the after-improved appraised value.
Generally no. Most renovation products require licensed contractors with reviewed bids, and self-help work is tightly limited where it is permitted at all. It is worth asking before you plan around it.
After closing, in draws, as inspections confirm the work is done. Renovation funds sit in escrow rather than arriving in your account at closing.
Yes — the contractor bid, the scope of work and the after-improved appraisal all add steps. Build it into the contract dates from the start and it is manageable. Discover it at day 20 and it is not.
More in the full mortgage FAQ, or ask me directly.
This is not an offer to enter into an agreement or a commitment to lend. Not all applicants will qualify. Information and rates are subject to change without notice. All loans are subject to credit review and approval. Program guidelines, fees and loan limits are set by the applicable agency or investor and are subject to change. Fairway Home Mortgage is a division of Fairway Independent Mortgage Corporation. NMLS Entity ID #2289.
Next step
Find out what you qualify for before you shop.
A documented pre-approval takes about 24 hours once your paperwork is in, costs nothing, and tells you whether renovation is genuinely your best route.