Renovation Loans: Finance the House and the Project

Found a fixer-upper you love, but it needs $50,000 in renovations? Don't walk away—renovation loans let you finance the purchase price and renovation costs in one mortgage. Here's how FHA 203(k) and Conventional HomeStyle loans work, which one fits your situation, and what to expect during the process.

Quick Summary

• FHA 203(k): Government-backed, lower credit requirements (580+), allows structural repairs, requires mortgage insurance
• HomeStyle: Conventional loan, better rates for strong credit (620+), more flexible on project types, no upfront MIP
• Both: Finance purchase + renovation in one loan, require contractor bids and inspections, funds held in escrow
• Key difference: 203(k) is more forgiving on credit/DTI; HomeStyle offers better terms for qualified borrowers

FHA 203(k) vs. HomeStyle: The Basics

FHA 203(k) Loan

Best for: First-time buyers, lower credit scores (580+), properties needing structural work, borrowers with higher debt-to-income ratios.

How it works:

• FHA-insured loan (3.5% down with 580+ credit, 10% down with 500–579)
• Can finance purchase price + renovation costs (up to FHA loan limits)
• Requires mortgage insurance (MIP) for the life of the loan if <10% down
• Allows structural repairs, foundation work, major systems replacement
• Requires HUD consultant for standard 203(k) on projects >$35k

Limitations:

• Loan limits vary by area (typically $498,257–$1,149,825 in high-cost areas)
• Upfront MIP (1.75% of loan amount) + monthly MIP
• Property must be owner-occupied (primary residence)
• Some luxury items excluded (pools, tennis courts, etc.)

Conventional HomeStyle Loan

Best for: Strong credit (620+), borrowers who want to avoid MIP, investment properties (HomeStyle Renovation), higher loan amounts.

How it works:

• Conventional loan (typically 5–20% down depending on property type)
• Finance purchase + renovation (up to conforming or jumbo limits)
• No upfront MIP; PMI can be removed at 80% LTV
• More flexible on project types (luxury items allowed)
• No HUD consultant required

Limitations:

• Stricter credit/DTI requirements than FHA
• Higher down payment requirements
• May require reserves
• Investment property version (HomeStyle Renovation) has different terms

Which One Should You Choose?

Choose FHA 203(k) if:

• Your credit score is 580–680
• You're a first-time homebuyer
• The property needs structural repairs (foundation, roof, major systems)
• Your debt-to-income ratio is higher (up to 43–50% with compensating factors)
• You want the lowest down payment option (3.5%)

Choose HomeStyle if:

• Your credit score is 680+
• You want to avoid mortgage insurance long-term
• The property needs cosmetic or luxury upgrades
• You're buying an investment property (HomeStyle Renovation)
• You want better rates and terms

The Renovation Loan Process: Step-by-Step

1. Pre-Approval & Property Selection

• Get pre-approved for the total amount (purchase + renovation)
• Find a property that needs work but is structurally sound
• Both loans require the property to be habitable (not a complete tear-down)

2. Contractor Bids & Project Scope

• Get detailed contractor bids for all renovation work
• Bids must include labor, materials, timeline
• Lender reviews bids to ensure work is feasible and properly priced
• 203(k): May require HUD consultant review for projects >$35k
• HomeStyle: Typically just lender review

3. Appraisal & "As-Improved" Value

• Appraiser evaluates current condition and "as-improved" value
• Loan amount based on the lower of: (purchase price + renovation costs) or (as-improved value)
• This protects you from over-improving the property

4. Closing & Escrow Setup

• Close on the purchase price + renovation costs
• Renovation funds held in escrow (not released to you)
• You get keys, but work must be completed before full loan funding

5. Renovation Period & Draws

• Work begins after closing
• Contractor submits invoices for completed work
• Lender inspects progress and releases funds in "draws"
• Typically 2–4 draws depending on project size
• Final inspection before last draw release

Real Example: $300k Fixer-Upper

Scenario: You find a $300,000 house that needs $50,000 in renovations.

FHA 203(k) path:

• Purchase price: $300,000
• Renovation costs: $50,000
• Total loan: $350,000
• Down payment (3.5%): $12,250
• Upfront MIP (1.75%): $6,125
• Cash needed: ~$18,375 + closing costs

HomeStyle path (assuming 10% down):

• Purchase price: $300,000
• Renovation costs: $50,000
• Total loan: $350,000
• Down payment (10%): $35,000
• No upfront MIP
• Cash needed: ~$35,000 + closing costs

Key takeaway: FHA requires less cash upfront but adds MIP. HomeStyle requires more down but avoids MIP long-term.

Common Renovation Loan Mistakes

1. Underestimating renovation costs: Get multiple contractor bids; add 10–15% contingency
2. Choosing the wrong contractor: Lender must approve contractor; they need proper licensing and insurance
3. Starting work before closing: Don't begin renovations until after closing and first draw approval
4. Not understanding draw process: Funds release in stages; plan cash flow accordingly
5. Over-improving the property: Appraiser determines max value; improvements beyond that don't increase loan amount

What Renovations Are Allowed?

Both loans allow:

• Kitchen and bathroom remodels
• Flooring, paint, fixtures
• HVAC, plumbing, electrical updates
• Roof replacement
• Window/door replacement
• Deck/patio additions
• Energy-efficient upgrades

FHA 203(k) also allows:

• Structural repairs (foundation, framing)
• Major systems replacement
• Accessibility improvements
• Lead paint/abatement

HomeStyle also allows:

• Luxury items (pools, tennis courts)
• Detached structures (garages, sheds)
• Landscaping improvements
• Investment property renovations (HomeStyle Renovation)

What To Do Next

1. Get pre-approved — Know your total budget (purchase + renovation) before house hunting
2. Find the right property — Look for structurally sound homes that need cosmetic or system updates
3. Line up contractors — Get multiple bids from licensed, insured contractors before making an offer
4. Talk with Harry — Get personalized guidance on which loan program fits your situation and timeline

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Quick FAQ

Can I do the renovations myself with a 203(k) or HomeStyle loan?

No. Both programs require licensed contractors. You can't act as your own contractor or do the work yourself, even if you're qualified. This protects the lender's investment and ensures work meets code.

How long does the renovation period last?

Typically 3–6 months, depending on project scope. FHA 203(k) allows up to 6 months; HomeStyle timelines vary by lender. Extensions are possible but require lender approval and may have fees.

What happens if the renovation costs more than estimated?

You have a few options: (1) Reduce scope of work, (2) Pay difference out of pocket, (3) If the as-improved value supports it, some lenders allow a loan modification. Always include a 10–15% contingency in your initial budget.

Can I use a 203(k) or HomeStyle for an investment property?

FHA 203(k) is owner-occupied only. HomeStyle Renovation (different from HomeStyle) allows investment properties, but terms are different—typically 15% down, stricter requirements.

What's the difference between a standard 203(k) and a limited 203(k)?

Limited 203(k) is for smaller projects (<$35k, no structural work, no HUD consultant required). Standard 203(k) is for larger projects and requires a HUD consultant. Most borrowers use limited 203(k) for typical renovations.

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Educational only; not a commitment to lend. Qualification and terms subject to credit, income, collateral, and underwriting approval. Equal Housing Lender. Rockhouse Mortgage, LLC. NMLS #2469785.