The FHA 203 (k) loan program ensures mortgages granted by private lenders approved by the FHA cover the cost of buying and fixing the property. You can also refinance with a 203 (k) loan to renovate your home. A home renovation loan gives homeowners the funds needed to repair their homes. These renewal loans can come in mortgages with built-in fixed finance or personal loans.
Depending on the type of loan you receive, you may need to prove that the money was spent on the house or was paid to a contractor. Before taking out an open mortgage, you should understand they could cost more over the loan term. But before we dive into the different options available, let's first look at the reasons why both buyers and homeowners often want to add renewal costs to their mortgage rather than applying for a second mortgage, such as a home equity loan or a home equity line of credit, or applying for a personal loan. These loans require extra work upfront before your loan is approved and even before you can submit an offer on a home.
Using a Fannie Mae HomeStyle loan to pay for your renovations has some benefits and drawbacks. Adding a home equity loan to your budget is generally more accessible since interest rates are usually set with the same monthly payment. Using a RenoFi loan can increase your borrowing power up to 11 times compared to a traditional home equity loan, making it easier to borrow all the money you need. You don't need to already live in the house; some home renovation loans can be used to buy a repaired home and make improvements immediately without needing to apply for separate financing.
It's common for homeowners to finance a remodel with a personal loan or high-interest credit card, but these tend to have alarmingly high-interest rates. However, financing options that allow you to combine these costs into a single loan usually have a higher interest rate than a mortgage that only covers the cost of the property. In a competitive housing market, a Fannie Mae HomeStyle Renovation loan may be better if you're looking to get an offer quickly. Unfortunately, it's easy to get confused with this term since some of the products offered as “home improvement loans” are only personal loans or rebranded unsecured credit cards that aren't suitable for most projects because of their high-interest rates, shorter terms, and limited loan size.
Borrowers need access to those funds as they would with a home equity loan or a cash-out refinance. Depending on the scope and cost of your home improvement goals, you may need to apply for a renovation loan. Renovation loans use the estimated value of a home after renovation rather than the current value of the house to calculate how much a homeowner can borrow.