The home you live in now isn’t just four walls. But with time, the most adored of primary residences may need a major investment be it to fix an aging foundation, put in a modern heating and cooling system or get that dream kitchen you’ve always fantasized about. Traditional methods of financing, such as personal loans or credit cards, can often be inadequate or come with high interest rates that fluctuate wildly.
These loan products are “for buyers of fixer-uppers, for existing homeowners and for qualifying homebuyers who simply wish to finance substantial repairs and improvements,” rolling the cost of a new kitchen or other upgrades into a single, new mortgage. This way, you can borrow against improvements you plan to make or expect your home to see an increase in value, which should give you much more borrowing power than a regular refinanced home equity loan.
If you’re exhausted procrastinating on that extensive project get ready because we have everything you need in order to utilize the top Rehab Loan options in the country, to upgrade your existing home.
Why Choose a Rehab Loan Over Other Financing?
When you own a home, there are many ways to finance improvements (HELOCs, home equity loans and cash-out refinances). Pages However, using a specific Rehab Loan provides unique benefits to larger projects:
- One Loan, One Payment: This is a good way of adding a new mortgage to an existing one; your loan will then be combo, either a fixed rate or ARM once the repairs are completed. This means a single closing and a single monthly mortgage payment.
- Financing Based on Future Value: An alternative to a traditional cash-out refinance that’s handicapped by the value of your home in its current state, a rehab loan can lend based on what you expect your home to be worth after the improvements are made. This is important if your house is now valued low because of the exact repairs you need to make.
- Competitive Interest Rates: Since these loans are backed by the home itself – and lender knows that money is being used for an improvement on the property -interest rates tend to be much more competitive than unsecured personal loans or credit cards.
- Essential and Cosmetic Work Funded: The uses of these loans range from mandatory health and safety repairs (like a bad roof, failing plumbing or unsafe electrical wiring) to aesthetic upgrades (in kitchens, bathrooms, and floor plan re-arrangements).
Top Rehab Loan Options for Existing Homeowners
For homeowners wanting to update and improve their homes, there are three government-sponsored loans that are both available directly by the borrower or funded by a lender on behalf of a borrower: FHA 203k; Conventional HomeStyle; USDA Rehab Loan; VA Renovation Loan.
1. FHA 203k Renovation Loan
The FHA 203k Renovation Loan is a government-insured loan and tends to be the most accessible option for existing homeowners who do not have lots of equity or who may not qualify for a very desirable credit profile.
Key Features for Refinancing:
- Easy Qualification Requirements: In general, FHA loans have more relaxed credit score and DTI requirements than conventional loans.
- Minimum Renovation Cost: The Standard 203k loan has no minimum required cost however, $5,000 is the least amount for projects.
- Two Options for Scope:
- Limited 203k: Offered for smaller projects that won’t include structural work, with a cost up to $35,000. It’s ideal for cosmetic updates such as small remodels, painting and window replacements.
- Standard 203k: This is for projects that you can’t just add a few coats of paint to, things over the limit or big structural changes like moving load-bearing walls, replacing a foundation or big floor plan reconfigurations.
- Covered Improvements: This plan covers just about any work that enhances the usability, function, efficiency, utility and appearance of your chatel; this includes but is not limited to:
- Structural changes to the entire floor plan.
- Modernization projects (e.g., kitchen and bathroom remodels).
- Elimination of health and safety hazards (e.g., lead paint, mold).
- Roof, plumbing, HVAC system reconditioning.
- Accessibility modifications for disabilities.
- Required Mortgage Insurance (MIP): HECMs require a UFMIP, just as they do for traditional loans, but they also mandate annual MIP for the full life of the loan regardless of LTV.
Refinance Note:
However, with a 203k rehab loan, the total amount of your repair budget is based on the home’s appraised value “after renovation,” so to speak.
2. Conventional Rehab Loan (Fannie Mae HomeStyle Renovation Loan)
This popular loan is called the Conventional Rehab Loan, and you may now learn Fannie Mae Homestyle Renovation and why this option is the better choice compared to other FHA loans including the 203K. This loan is more flexible for homeowners that have equity, solid credit history.
Key Features for Refinancing:
- Flexibility on Projects: This program is famously flexible. Contrary to the FHA 203k, the HomeStyle loan enables you to finance luxury renovations like swimming pools, outdoor kitchens, or standalone Accessory Dwelling Units (ADUs) if they are adding value to the property.
- Renovation Limit: The amount of the refinanced renovation phase may not exceed 75% of the as-completed appraised value of the home. On most loans the maximum loan amounts are higher than what the FHA will allow.
- Contractor Choice: The borrower may choose any home contractor for the renovation according to US construction company, whereas VA loan requires a VA-approved one.
- Mortgage Insurance: The new LTV exceeds 80% (meaning you have less than 20% equity) and requires payment of Private Mortgage Insurance (PMI). The main upside to a Conventional loan is that it can be waived when your equity reaches 20%; which ultimately translates into paying slightly less on your loan.
Refinance Note:
For an existing homeowner, this loan is used as a Limited Cash-Out Refinance that includes the costs of renovation. It’s often the preferred option for high-cost, discretionary, or luxury updates.
3. VA Renovation Loan (The Premier Choice for Veterans)
The VA Renovation Loan is the best option for Veterans who have just returned from deployment or are re-entering civilian life.
Key Features for Refinancing:
- No Down Payment Necessary: Although you are refinancing your existing loan, the core VA benefit means there is no down payment required, even when financing significant repairs.
- No PMI: This is by far the best feature, as you could save a lot of money over the life of your mortgage because there is no monthly PMI/MIP with Conventional and FHA home loans.
- Attractive Interest Rates: VA loans current have interest rates that are lower than mortgages on the market.
- Financing on Completed Value: You can borrow up to the complete value of the home once it is finished, as determined by the VA appraiser.
- Covered Repairs: The VA guaranteed loan will finance everything from safety and livability, roof repairs to foundation work or plumbing, heating/AC systems as well as accessibility features for handicapped.
Renovation Loan Comparison Table: VA vs. Alternatives
| Feature | VA Renovation Loan | FHA 203k Renovation Loan | Conventional Rehab Loan (Fannie Mae HomeStyle) | USDA Rehab Loan |
| Primary Borrower | Eligible Veterans / Service Members | General Public | General Public | Low-to-Moderate Income |
| Required Down Payment | 0% | Low (typically 3.5%) | Low (typically 3%) | 0% (100% Financing) |
| Location Eligibility | Nationwide | Nationwide | Nationwide | Rural and Semi-Rural Areas Only |
| Renovation Limit | Typically up to $75,000 | Limited 203k: up to $35,000 | Up to 75% of the “as-completed” appraised value | Renovation cost must be less than 10% of appraisal value of $10,000 (often minimum is $10k, or 10% of value) |
| Mortgage Insurance | No PMI Required | Required (MIP) | Required (until 20% equity is reached) | Required (Annual Fee) |
| Contractor | VA-Approved Third-Party | HUD Consultant Required (for standard 203k) | Borrower Chooses Contractor | General Contractor Required |
VA Loan Requirements & Exclusions:
- Eligible veterans: To be eligible for maximum monthly benefits, you must be a service-disabled veteran with COE.
- Exclusions: The VA v. Conventional Exclusions are much more stringent on the VA than the Conventional topic. Luxury updates (think pools) and major structural changes (like foundation rebuilds) beyond safety and livability are typically not factored in.
- Contractors: You will need to use a VA- approved contractor who has been reviewed by the lender.
USDA Rehab Loan
USDA Rehab Loan Designed to help low-to-moderate income buyers, purchase and repair a home in rural or semi-rural locations. It is one of the handful programs that provides 100% financing to qualifying home buyers.
- Location: The home you’re purchasing needs to be in a rural or semi-rural area that is approved by the United States Department of Agriculture (USDA).
- 100% Financing: You have the option of financing your property, and renovation costs (if applicable) up to 100% of the purchase price.
- Credit Requirement: The lowest credit score needed for approval is 620.
- Renovation Requirements: Work must be performed by a general contractor, and home repair work should start after the loan closes.
- Income Limits: This program is intended to assist low-income earners meet USDA income eligibility requirements.
How to Start Your Rehab Loan Process
Though which program you choose, the process of financing your home improvement follows a fairly consistent pattern:
- Check Eligibility: Make sure you have the basic details to qualify for the type of loan that you want (being a Veteran, meeting FHA criteria, or having Conventional credit ratings).
- Define Your Scope of Work: Make a list, and check it twice. Are you calling out only for essential repairs (roof, heating and cooling) or discretionary upgrades (kitchen, bath)? It will dictate whether your best option is a Limited 203k, Standard 203k or HomeStyle loan.
- Hire a Contractor: It will be necessary to hire a California licensed general contractor to place detailed bids & complete project specifications. Keep in mind, some programs (VA and Standard 203k) have specific contractor approval requirements or call for the use of an FHA/HUD consultant.
- Obtain an “As-Completed” Appraisal: Your lender will want to order an appraisal based on what the home is expected to be worth once all of the work is complete. This is what the final loan amount will be based on.
- Close the Loan: After you’ve been approved here, close on the one loan. Some of those funds will go toward paying the balance on your current mortgage and then, any remaining renovation money will be put into an escrow account.
- Renovations Begin: The contractor begins renovations. Disbursements from escrow are made in draws through release requests that are used to schedule inspections and verify certain phases of the work have been completed according to contract.
Recommendation: If you qualify, the VA Renovation Loan is the best option due to the absence of a down payment and monthly PMI. If you do not qualify for the VA, the choice between FHA 203k and Conventional HomeStyle depends entirely on the type of renovations you plan to do and your current credit and equity position. By consolidating your mortgage and renovation costs into a single, affordable loan, you can finally turn your current house into the perfect, fully customized home you’ve always envisioned.
