Renovation loans for first-time homebuyers
This article is for educational purposes only. JPMorgan Chase Bank, N.A., does not offer renovation loans. Any information described in this article may vary by lender.
Quick insights
- A renovation loan allows first-time homebuyers to roll the purchase and home improvement costs into one mortgage.
- Some of the more popular loan options include FHA 203(k), Fannie Mae HomeStyle® and VA renovation loans. Each loan product has different requirements and benefits.
- If you plan to apply for a renovation loan, expect additional documentation, contractor estimates, staged escrow draws and potentially higher closing costs than a standard mortgage.
Purchasing your first home is very exciting, but your dream place might come with a few imperfections that need attention. From cosmetic updates to more serious home improvement projects, a renovation loan allows a homebuyer to finance both the purchase of the home and necessary repair costs in a single mortgage. This could make buying a fixer-upper and transforming it to your vision more manageable, financially speaking.
In this article, we will walk through the renovation loan programs, how the process works and important considerations like closing costs and mortgage preapproval.
Types of renovation loans for first-time homebuyers
A renovation loan is a financing option that lets first-time homebuyers combine the cost of purchasing a home with the cost of improvements. That flexibility might make it easier to consider properties that need updates instead of waiting years to save for repairs. Depending on the loan program, renovation loans could cover minor fixes, accessibility upgrades or more extensive remodeling. Keep in mind that eligibility rules, allowable work and timelines may vary. Some of the more common programs include:
FHA 203(k) loan
- FHA 203(k): FHA 203(k) loans allow qualified homebuyers to finance both the purchase price of the home and eligible renovations into one loan. This loan type may be useful for modest to moderate repairs.
- FHA 203(k) example: Imagine a first-time homebuyer finds a house listed at $200,000, but the home needs about $40,000 worth of updates like a new roof, updated plumbing and modern kitchen cabinets. Instead of taking out a separate loan for the repairs, the homebuyer might use an FHA 203(k) renovation loan to combine the $200,000 purchase price and the $40,000 in renovations into one $240,000 mortgage.
Fannie Mae Homestyle loan
- Fannie Mae HomeStyle: The HomeStyle loan could offer broader flexibility for cosmetic and structural projects. This could be an optimal loan for first-time homebuyers who want more control over the scope of work.
- Fannie Mae HomeStyle example: A buyer spots a charming older home listed for $250,000; however, the home needs $30,000 of repairs or improvements, such as installing new flooring, applying fresh paint and or renovation upgrades to the bathroom. Using a Fannie Mae HomeStyle renovation loan, the homebuyer could possibly combine the $250,000 purchase price with the $30,000 renovation costs into a single $280,000 mortgage.
VA renovation loans
- VA renovation loans: For eligible veterans, servicemembers or surviving spouses, this might help finance repairs and improvements subject to VA rules and loan limits.
- VA renovation loans example: An eligible veteran finds a home for $220,000 that needs about $15,000 in repairs, including replacing old windows and updating the electrical system. With a VA renovation loan, the homebuyer might be able to roll the $220,000 purchase price and the $15,000 in improvements into a single $235,000 mortgage.
Each loan program has unique paperwork, timelines and mortgage underwriting differences.
How renovation loans work for first-time homebuyers
With a renovation loan, you could purchase a home that needs work and include the estimated renovation costs in your mortgage balance; therefore, you only pay one monthly amount. As part of the underwriting, renovation loan providers might require a detailed renovation plan, contractor bids or estimates and sometimes an approved contractor list. After closing, renovation funds are often held in escrow and released in draws as work is completed; this staged approach may help ensure projects stay on track and meet lender standards.
Steps to get a home improvement loanÂ
Securing a renovation loan as a first-time homebuyer may take a few additional steps, but the process can be manageable once you know what to expect. While each home loan program has its own requirements, here’s a general outline of how the process goes:
- Research loan programs and eligibility: Start by learning about renovation loan options and check whether you qualify.
- Get mortgage prequalification or preapproval: Connect with a mortgage lender who offers home renovation loans. Either prequalification or preapproval could give you a clearer idea of your potential budget and help you plan more effectively before making an offer.
- Work with a real estate agent and contractor: Speak with a real estate agent to find a property that fits your specific needs. Additionally, consult with a licensed contractor to create a detailed renovation plan with cost estimates. They may be required by the lender as you work to secure the loan.
- Submit your application: Provide your renovation plan, contractor bids and other required documentation to your loan provider as part of the loan application. From there, additional steps of the home purchase may need to be completed before renovations begin.
In summary
A renovation loan might be a useful path for a first-time homebuyer who’s willing to manage a project and wants to spread home improvement costs over the life of a home loan. While these loans could open doors to more affordable or better-located homes, they also introduce extra paperwork, steps and potential closing costs. When approaching a fixer-upper or any home you want to buy and renovate, knowing your financial options and having a thorough plan can help.Â
