Buying a Home: Is it possible to include extra funds for renovations in a loan for a new house?

Two little-known home renovation mortgage programs offer solutions for buyers and homeowners who want to renovate.

Fannie Mae and the Federal Housing Administration have home renovation mortgage programs that allow buyers to borrow based on what the house is expected to be worth after the home rehab is completed. Homeowners can also use both programs to refinance their existing mortgage plus the renovation costs into one loan.

FHA’s 203(k) program and Fannie’s HomeStyle Renovation Mortgage have been around for years. In the old days — when most borrowers could easily get second mortgages or generous credit lines to pay for renovations — these loans weren’t as appealing as they are today.

Demand for this type of loan surged in the aftermath of the housing crisis, when borrowers saw them as a way to buy and renovate distressed properties. Even though demand for rehabilitation loans is up, many borrowers are not aware of the programs, or else they think they are too complicated. But they aren’t as complicated as they seem.

Unlike credit lines, these renovation loans require borrowers to prove that the money was spent on the house. In the standard FHA 203(k) program, the borrower hires a consultant to assess the construction plan and to perform an inspection before each draw is made. A “draw” happens when a portion of the money is disbursed to the contractor. Borrowers have up to six months to finish the project and are allowed up to five draws. The HomeStyle program does not require a consultant to monitor the work, only an initial and final inspection.

These types of loans give the borrower more than just the amount needed to purchase the property, but enough to let them repair or update the property to make it comfortable. This allows for the homebuyer to purchase an available home with relative ease, regardless of the condition, and fix it with the money allotted by the loan. 

- Moore