How do renovation loans work

It’s a question that many homeowners ask when they are starting to consider renovating their home.

Below, we’ll take a look at everything you need to know about funding your home renovations.

What is a renovation loan?

A renovation loan simply refers to an additional loan that comes with a standard mortgage thatwould help you cover the renovation costs of the property. Also known as a Purchase Plus Improvement Mortgage, it’s a way to use some of your equity to renovate and improve the home. This usually involves calculating an estimate of how much the renovations will cost before you apply for the loan.

How do renovation loans work?

There are several types of common renovation loans, and how they work will vary slightly.

Fannie Mae HomeStyle®

This single-close loan will include the renovation costs into your overall mortgage, which often covers for repairs that an appraiser might ask for. This is one of the most popular types of renovation loan because it’s convenient and requires you to get only one loan and make one payment per month.

FHA 203(k)

The FHA 203(k) is government-backed and a great alternative for borrowers with a low credit score. However, this also means that the mortgage insurance is higher because you’re allowed to make a smaller down payment. Keep in mind that this loan is designed only if you’re buying a primary residence.

Jumbo Renovation Loan

Similar to a jumbo loan, a jumbo renovation loan is made for homes that are more expensive than the average price. You can use this to make any repairs needed by an appraiser or that you personally want, as long as it adds value to the property.

USDA Rural Development Home Repair Loan

The USDA also has a renovation loan program for homeowners to afford safe and secure homes. The loan is often used to purchase new appliances, improve roof and foundations, windows, plumbing, and other important aspects of the house. It’s available for those with low income and living in a rural area.

Reasons to renovate your home

Why do you want to renovate your property? Why should you? In addition to increasing its visual and aesthetic appeal, there are actually other benefits to renovating your home. Such as…

  • Boost property value
  • Improve utility for added function
  • Make it more comfortable to live in
  • Maximizing safety and health features
  • Turn the basement into a rental place
  • Make the house easier and more attractive to sell

A lot of people spend more time today working and relaxing at home, which means it has never been more imperative to maintain a cozy and welcoming atmosphere in the place. Renovations can help turn your house into an oasis that feels safe and personal to you, making it more enjoyable to be there.

But not only that, renovating your property can also be beneficial in terms of improving its value. It can make the home more attractive to potential buyers, especially if you are planning to sell it in the future.

Alternatives to renovation loans

Yes, renovation loans can provide you with enough funds to make large improvements to your property. However, if you only need to make smaller repairs that cost below $10,000, there are some alternatives you may want to consider:

  • Credit card: Perhaps the easiest and most convenient way to get a loan for minor projects. But remember that overusing your credit card can impact your credit score negatively, which may hamper any future loan applications you might make. So, use this
    option wisely!
  • Personal line of credit: This is even more affordable than credit cards but can also have a negative consequence on your credit score.
  • Deferred payment loan: It’s a great way to help you afford large purchases that come with little to no payments for the first year. However, it can be expensive in the long-term because of the relatively high interest rates.
  • Home improvement loan: A home improvement loan is maybe the best alternative to a regular renovation loan as it offers different structured options for the repayment, ranging from six months to several years. You can easily adapt it to the amount of loan that you need and your financial capabilities, and this flexibility is what makes it super attractive.


Overall, there are even more renovation loans you can try. These are some of the most common ones we can recommend for you. If you want to make large repairs and undertake big improvement projects in your home, then a renovation loan is right for you.

On the other hand, if you have a stricter budget or just want to make smaller repairs, take a look at some of the alternative we have mentioned above! Whatever it is, renovations can be beneficial if you do it right and are wise about the funding. Best of luck!