Renovation Refinance: Loan Explained

Does your home need some TLC? Maybe it’s time to add a new master suite or upgrade the kitchen? If these or any other construction projects are on your list this year, it might be time for a renovation refinance loan.

Similar to a cash-out refinance, the renovation refinance is a mortgage product can be a big help in turning your existing home into your dream home.

The Benefits of a Renovation Refinance

When interest rates are low, a renovation refinance can be a great choice. In addition to a lower rate, mortgages have several advantages over other loan types. A home loan typically comes with a longer payoff, larger loan amount, and manageable monthly payment. As of the date of this publication, mortgage rates are at historic lows, making refinances an attractive choice for many homeowners.

Do you feel priced out of today’s competitive real estate market? When the supply of home inventory is low and demand is high, remodeling and/or adding on to your current home might be the solution. Depending on market conditions, refinancing to renovate could be less stressful than shopping for a new home. According to the National Association of Realtors, home inventory in America was down by about 20% in 2021 versus 2020. This has resulted in higher prices, bidding wars, and long waits for would-be home buyers. If what you need is an extra bedroom or a bigger garage, a renovation refinance might be a workable solution! Plus, the updates will probably add value to your home. The resulting increase in equity will come in handy if you do decide to move in the future.

What Can a Renovation Refinance Cover?

Renovation refinances are intended to pay for remodeling and repairs performed by a licensed contractor. For this reason, your lender will probably require an estimate from an approved contractor prior to final loan approval. The appraisal that the underwriter uses for qualification purposes is based on the future value of the home; thus, the mortgage amount can be higher than the current value of the home.

A renovation refinance can pay for cosmetic as well as structural updates. Necessary safety and mechanical repairs can also be included. Of course, it is important that any improvements contracted as part of the mortgage approval process will add value to the home. Planned work must be completed within the time frame required by the lender, usually 6 to 12 months after closing. Monies for the proposed updates will either go directly to the contractor or into an escrow account managed by a third party.

Loan Products

Several options exist for homeowners who want to explore renovation refinance loans.

Fannie Mae HomeStyle/Freddie Mac CHOICERenovation – These are conventional loan products that adhere to basic conventional underwriting guidelines. Borrowers must have a favorable credit score and debt-to-income ratio. the amount that Fannie Mae and Freddie Mac will lend for renovations is limited to 75% of the future value of the subject property. Manufactured housing is eligible but with tighter lending limits. If your credit is good and you have a solid payment history, your loan officer may recommend a conventional refinance product.

FHA 203(k) – As is typical for FHA-insured mortgages, the 203(k) loan can be easier to qualify for than the HomeStyle. Borrowers should plan to pay for FHA insurance depending on their loan-to-value ratio at the time of closing. The subject property must be older than one year and the mortgage will be subject to FHA maximum loan limits for the area. Planned repairs must cost over $5,000 if you refinance into an FHA 203(k) loan, but another option exists for refinancing smaller projects.

VA Cash-Out Refinance – The United States Department of Veterans Affairs does not offer a true renovation refinance product. However, veterans may be eligible for a VA-backed cash-out refinance loan that can be used for home repairs, updates, or renovation. This type of refinance can occur even if the existing mortgage is not a VA-backed loan. General eligibility requirements for VA loans can be found on their website at https://www.va.gov/housing-assistance/home-loans/eligibility/.

Contact a Loan Officer

Do you want to find out if a Renovation Refinance is right for you? Contact the loan team at Ruoff Home Mortgage to get started