A renovation loan lets you finance both the purchase price of a home and the cost of repairs in a single mortgage. The two main types are FHA 203k (limited and standard) and Fannie Mae HomeStyle (conventional). You borrow based on the home's after-repair value. Contractors bid on the work, and funds are disbursed as work is completed.
Types of Renovation Loans
FHA 203k Limited: up to $35K in repairs, for cosmetic updates, no structural work. FHA 203k Standard: any amount, for major renovations including structural. Fannie Mae HomeStyle: conventional renovation loan, flexible, for primary residences and second homes. VA renovation loan: for eligible veterans. USDA renovation loan: for rural properties.
Requirements for Renovation Loans
Credit score: typically 620+ for FHA, 660+ for conventional. Down payment: 3.5% for FHA, 5-20% for conventional. Contractor must be licensed and provide a bid. The work must be completed within a set timeline (typically 6 months). The lender manages the disbursement of funds as work progresses.
Loan Limits and Repair Limits
FHA 203k Limited: up to $35K in repairs. FHA loan limits apply to the total. Fannie Mae HomeStyle: maximum repair amount varies but typically cannot exceed 50% of the after-repair value. Total loan cannot exceed conforming loan limits. Always check current limits for your county.