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What to Consider When Purchasing a Home That Needs a Home Renovation Loan


In today’s booming housing market, it can be hard to find the perfect move-in ready house. In February alone, existing home sales rose 3 percent, but the number of available houses for purchase is still down 8.1 percent from a year ago, according to the National Association of Realtors.

With so many homebuyers on the hunt and so few houses to go around, don’t underestimate a house that needs repairs or upgrades in order to be your future dream home. If the thought of having to find additional money for repairs on top of your home purchase price has you anxious, worry no more—there are plenty of options for extra financing and capital.

Here are a few types of home renovation loans and what to consider as you decide which loan is right for you.

VA Home Renovation Loans

If you’re an eligible veteran, the VA home renovation loan is the best option for buying a home that needs minor repairs. As a military family moving around a lot, if you want to purchase your first house in the right school district, you might not have the time to search for the perfect house and a house that needs repairs could be the quickest, easiest solution.

Here are some VA home renovation loan details to consider:

  • Veterans only: Although this might seem obvious, only active duty members of the U.S. military, a veteran, or spouse are eligible for this type of loan.
  • A better deal: The VA home renovation loan isn’t a separate loan—it’s actually rolled into your mortgage, so you have one rate and one payment, meaning the loan can save you a lot of money.
  • Zero down: This home renovation loan features many of the same perks as a regular VA loan, which includes zero money down when you purchase your home.
  • 30-year plan: You can set your loan up to be financed over 30 years, which can mean a lower monthly payment.
  • Credit score: Typically, VA home renovation loan lenders are looking for a credit score of around 620, but speak with your lender because some will go as low as 580.
  • Immediate funds: Because the renovation loan is bundled with your mortgage, your repair funds are available at the time of purchase.

With a VA home renovation loan, you typically have three to four months to complete the repair work. The loan usually offers up to $35,000 for minor home renovations and upgrades, including:

  • Kitchen and bath remodels
  • New plumbing, electrical, or HVAC systems
  • Energy-efficient upgrades
  • Finishing a basement or attic
  • New appliances or cabinets (only for the rooms being renovated)
  • New paint, windows, or flooring

A few other important things to consider are that the house must be a one- or two-unit home and the house must be your primary residence. You can only use one general contractor, and they must be registered with the VA and have sufficient insurance through a current general insurance liability policy.

Other Home Renovation Loans

If you’re not a military veteran but still aspire to purchase a house for the first time and know that repairs will be needed, consider one of these options to ensure you can turn whatever house you buy into the home of your dreams.

Fannie Mae’s HomeStyle Loans

The HomeStyle Renovation Loan allows you to purchase a home that is in need of repairs, and much like the VA home renovation loan, the renovation loan is rolled into your mortgage, reducing paperwork and closing costs. Here are a few more considerations for this loan:

  • It must be for a primary residence.
  • Must provide a down payment of at least 5 percent of the purchase price of the home.
  • Buyer must have a credit score of at least 620.
  • A certified contractor must prepare and submit a cost estimate and details of the renovations to be completed.

It’s also important to know that, unlike a home equity loan or cash-out refinance, the renovation funds are put in a separate escrow account from which you pay the contractor directly. Because the HomeStyle loan requires a cost estimate and details of the renovations, it might seem like an unattractive option that could get held up. If you’ve found a house in need of repairs and want to jump on it quickly, speak to your lender about other options that might make more sense, including the FHA 203(k).

FHA 203(k) Loans

Through the Federal Housing Administration (FHA), you may be eligible for a home renovation loan called the 203(k), which usually has lower credit score requirements and a down payment of only 3.5 percent of the home purchase price. There are two different types of FHA 203(k) loans:

  • Limited FHA 203(k): This loan is for cosmetic improvements and minor renovations and is capped at $35,000.
  • Standard FHA 203(k): This loan is for extensive improvements, but you must hire a qualified 203(k) consultant to manage every aspect of the renovations, from planning to completing the work.

The benefit of applying for a Standard FHA 203(k) is that you don’t have to go to the trouble of researching and finding a reliable contractor to oversee the work and give you an accurate cost assessment, which can waste time and energy before you make your purchase. Additionally, much like the HomeStyle loan, funds for improvements are held in escrow and paid directly to the contractor. If you’re a veteran but anticipate needing to do more than $35,000 of work on the house you’re purchasing, the Standard FHA 203(k) might be an excellent alternative.

Turning your first-time home dreams into reality should be a positive, seamless experience. Whether you’re looking for a VA home renovation loan, HomeStyle Loan, or FHA 203(k) loan, schedule your free consultation with seasoned loan consultant Rick Elmendorf and his team today.