Can Renovation Costs Be Included in a Home Loan?

While many prospective homeowners in California choose to purchase homes that are already in great condition, a large number of potential homeowners instead decide to buy a “fixer-upper.” A “fixer-upper” is a type of home that requires substantial maintenance work before it’s livable. It’s possible to purchase a home in Orange County or Riverside County in poorer condition so that you can increase its home value with renovations and extensive repairs. In this situation, you may want to add the estimated renovation costs to your mortgage to reduce some of the risk that comes with making this type of purchase.

Adding Renovation Costs to Your Mortgage

While mortgages and home loans are designed solely to cover the costs of purchasing a home, there are several loan options that allow you to add renovation costs to the loan. With this type of loan, you can factor the estimated renovation costs directly into the loan.

Let’s say that you obtain a loan that covers 105% of the total asking price. With these terms, 5% of the total asking price will be available for renovation costs. If you purchase a home that costs $200,000, this indicates that you would have access to $10,000 for renovations. Keep in mind that home loans that cover purchase costs and renovation costs are typically referred to as rehab loans.

Types of Rehab Loans Available to You

The three primary rehab loans that are available from mortgage lenders include the FHA 203(k), the Fannie Mae HomeStyle Renovation loan, and the Freddie Mac Renovation Mortgage. The Federal Housing Administration backs all FHA loans and offers two types of 203(k) loans, which include a standard 203(k) and a limited 203(k). The standard 203(k) is meant to be used when major repairs and renovations are needed. These loans come with a minimum renovation requirement of $5,000.

If you decide to seek a limited 203(k) loan, minor renovations can be made as long as they are below $35,000 in total value. Both the Fannie Mae and Freddie Mac loans are available as fixed-rate or adjustable-rate loans with terms that extend from 15-30 years. These are very similar to conventional home loans.

When you see potential in a dilapidated or worn-down home and believe that you would be able to renovate and restore it, you can do so with a rehab loan. Since there are several types of rehab loans available to you, consider speaking with a mortgage broker to determine which option is best for your situation. You can also contact our loan officer to learn more about the loans we provide.