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Published by Contour Mortgage on March 26 2021

Can You Add Renovation Costs to Your Mortgage?

Topics: Home Buyers, 203k Loan

Editor’s Note: This blog post was originally published in April 2018 and has been revised to reflect industry updates.

As the real estate market continues to experience record-low mortgage and interest rates, higher-than-average prices, and bidding wars, many prospective buyers could become frustrated.

This is especially challenging with many sellers receiving higher-than-ask, multiple offers. WIth competition heating up even in moderately priced regions, another option is pursuing a home renovation or remodeling project.

While the most conventional route is a move-in ready or new construction home, other options include fixer-uppers or rehab properties. With both requiring more upgrades, repairs and maintenance, purchasing a home that needs work could be the ticket to your customized dream home. 

Despite these advantages, some consumers are still hesitant due to uncertainty regarding project scope and affordability. Many often wonder: Is there a way to add renovation costs of my new home to a mortgage?

The short answer is: Yes.

While you’ll likely have additional questions, it’s best to contact a reputable lender, such as Contour Mortgage for guidance when choosing the right rehab loan for your project.

Let’s review the benefits, requirements, and pros and cons of each rehab loan offered through Contour Mortgage.

FHA 203(k) 

Insured and backed by the Federal Housing Administration (FHA), 203(k) renovation loans are utilized for borrowers purchasing a fixer-upper or “handyperson special” in need of repairs, upgrades, and renovations. 

Whether work is completed by licensed professionals, or on your own, this facilitates the necessary funding for home purchase and accompanying renovations. 

Note the two versions and types of this loan:

Standard 203(k)

This is designed for major repairs to a primary residence property. Addressing damages from fire or flooding would likely be covered by a standard 203(k) loan. 

Foundation issues could also fall within this category for required structural improvements mitigating safety risks. Room additions and floor repairs would also be eligible. 

With minimum renovation requirements starting at $5,000, this loan covers up to $625,000 for both purchase and renovation costs.

Limited 203(k)

Sometimes referred to as streamline, this loan covers less extensive repairs, comprising changes less than $35,000. This can include upgrades and other cosmetic improvements, such as kitchen and bathroom updates, and replacing outdated appliances. 

Pros

      • Borrowers Can Choose From Two Loan Types
      • Covers Home Purchase, Refinancing & Renovations
      • Low Down Payment Requirements

Cons

      • Upgrades Can Be Subject to Approval
      • Applicable to Single-Family Residences Only
      • Not Ideal for a Move-In-Ready Solution

 

Fannie Mae HomeStyle 

The Federal National Mortgage Association, also known as Fannie Mae, offers its HomeStyle Renovation Mortgage option.

Available as a fixed- or adjustable-rate mortgage (ARM), the original principal cannot exceed the association’s maximum mortgage amount for a conventional primary mortgage. 

The transaction type also plays a role in how much is covered. According to the HomeStyle Renovation Mortgages: Loan and Borrower Eligibility requirements, borrowers purchasing a home cannot incur rehab costs more than “75 percent of the lesser of the sum of the purchase price of the property plus renovation costs, or the ‘as-completed’ appraised value of the property.” 

Borrowers looking to refinance would not be permitted to exceed 75 percent of the as-completed appraised property value. 

Pros 

      • Available as Both Fixed or ARM Options
      • Loan Can Be Combined With Other Fannie Mae Products 
      • Includes Repair Contingencies

Cons

      • Cannot Be Used to Rebuild a Home
      • Could Require Additional Paperwork
      • Project Must Be Completed Within Specified Time Frame

 

Freddie Mac Renovation Mortgage

Similar to the aforementioned Fannie Mae HomeStyle, Freddie Mac also offers a renovation loan for both single-family and multiple-unit dwelling properties. This also applies to second home or investment properties.

These fixed-rate or ARM loans can be paid off with terms ranging from 15 to 30 years. Down payments for single-family homes can be less than the typical standard 20 percent, with higher rates for multi-family properties. 

Applicable credit ratings are also required, and guided by down payment amount, debt-to-income ratio, and other factors. 

Pros

      • Lower Down Payments
      • Less Stringent Credit Requirements
      • Applicable for Investment Properties, Second Homes & Multi-Family Dwellings

Cons 

      • Manufactured Homes Aren’t Eligible
      • Borrower Cannot Be Affiliated With/Related to Builder, Developer, or Seller

 

Ensure Due Diligence

If a renovation or rehab project is something you want to tackle, be sure to first speak with a reputable mortgage lender to understand specific options, financing, and other important requirements. 

 


 

Contour Mortgage provides lending services throughout the United States. Contact us to learn more about our various renovation and rehab property financing options. 

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