Renovation loans: buy the house and fix it with one mortgage

What is a renovation loan?

A renovation loan is one mortgage that covers the purchase of a home, or a refinance of the one you own, plus the cost of repairs or improvements. The loan amount is based on what the home will be worth once the work is done, called the as-completed value, rather than its value today.

At closing, the repair money doesn't go to you. It's held in an account and paid to your contractor in stages as the work is inspected and finished. You make one monthly payment on one loan.

How does an FHA 203(k) loan work?

The FHA 203(k) program comes in two versions, and the size and type of the work decides which one fits:

• Limited 203(k) is for non-structural work such as a new roof, a furnace, windows, a kitchen or flooring. Total repair costs can be up to $75,000 (raised from $35,000 for FHA case numbers assigned on or after November 4, 2024), and the work must be done within nine months. A 203(k) consultant is optional.
• Standard 203(k) is for bigger or structural projects, such as foundation repair, moving walls or adding a unit. Repairs must total at least $5,000, the program sets no repair maximum (the loan still has to fit FHA's loan limit for the county), and the work must be done within 12 months. An FHA-approved 203(k) consultant is required. The consultant inspects the home, writes up the work, checks that permits are pulled and inspects before each payment to the contractor.

Like other FHA loans, a 203(k) is for a home you'll live in. It can finance a 1 to 4 unit home, an eligible condo unit or a manufactured home, for a purchase or a refinance. An accessory dwelling unit can be included if it's attached to the house. The FHA loan guide covers the rest of FHA's rules.

What are HomeStyle and CHOICERenovation loans?

These are the conventional versions, from Fannie Mae (HomeStyle Renovation) and Freddie Mac (CHOICERenovation). They don't split work into structural and non-structural, and they can be used for more than your own home:

• Fannie Mae HomeStyle Renovation works for a 1 to 4 unit home you live in, a one-unit second home or a one-unit investment property, for a purchase or a refinance. On a purchase, the renovation costs can be up to 75% of the lower of the purchase price plus renovation costs, or the as-completed value.
• Freddie Mac CHOICERenovation covers the same kinds of homes, for a purchase or a refinance that doesn't take cash out, with a similar 75% limit. It can also pay to repair disaster damage or to make a home more resilient, and the work must be done within 12 months of closing.

Conventional renovation loans can make sense for a second home, a rental, or a buyer whose credit and savings would also qualify for a regular conventional loan.

For smaller projects, Fannie Mae's HomeStyle Refresh adds updates such as a kitchen or bath, an accessory unit or energy upgrades to a standard conventional purchase or refinance, with the work finished within 180 days. FHA's Energy Efficient Mortgage can add energy improvements to an FHA loan. See smaller renovations and energy upgrades.

How do the renovation loans compare?

HUD's program comparison lays out the main differences between FHA 203(k) and the two conventional programs:

All three require contractors to be licensed where the law requires it, and all three can pay up to half of the material costs up front. Lenders can add their own rules on top of these.

What kind of work can a renovation loan pay for?

Most repairs and improvements that stay with the house. HUD lists these examples for a Limited 203(k):

• Health and safety fixes, including lead-based paint stabilization
• Roofing, siding, gutters and downspouts
• Plumbing, heating, air conditioning and electrical systems
• Wells and septic systems
• Kitchens, appliances and other updates
• Accessibility for people with disabilities
• Decks, porches, patios, walkways, driveways and fences

A Standard 203(k) adds structural work: repairing or rebuilding a foundation, structural alterations, converting a single-family home to 2 to 4 units, or rebuilding on an existing foundation. The conventional programs cover a similar range, and a lender can tell you whether a specific item, like a pool or a detached building, fits the program you choose.

How do contractor bids and draws work?

A renovation loan adds a few steps to a normal purchase, so plan for them before you make an offer:

1. Bids. Your contractor writes a detailed bid for the work. For a Standard 203(k), the consultant prepares the work write-up.
2. Appraisal. The appraiser values the home as it will be once the work is done, using the plans and bids.
3. Closing. The repair money is set aside in an account, along with a contingency reserve for surprises like rot behind a wall.
4. Draws. As work is completed and inspected, the money is paid out in stages. Up to half of the material costs can be paid at the start.
5. Final inspection. Once the work is done and signed off, any unused contingency is handled as your loan terms say.

For a Limited 203(k), each contractor can be paid in up to four draws, and a Standard 203(k) allows up to five. The lender must release each draw within five business days of a proper request (HUD Mortgagee Letter 2026-06).

Expect the process to take longer than a regular purchase, and let your agent know early so the closing date in the purchase agreement leaves room for bids and the appraisal.

Should I use a renovation loan or a HELOC later?

If the work has to happen right away, or the home won't qualify for regular financing until it's fixed, a renovation loan pays for it from day one. A home equity line of credit only works once you have enough equity, which most new buyers don't have right after closing.

If you already own your home and have built equity, a HELOC or a cash-out refinance can be simpler, with no bids or draw inspections. The HELOC vs cash-out refinance guide compares those two.

Why do renovation loans fit so many older New Hampshire homes?

Many New Hampshire homes, from old farmhouses to mill-era multi-families, were built before 1978. Federal rules treat those homes differently: EPA's Renovation, Repair and Painting rule requires firms that disturb paint in a pre-1978 home to be lead-safe certified, and an FHA appraisal can flag peeling paint that has to be fixed. Older homes also tend to have aging heating systems, wells and septic systems that a renovation loan can cover.

Before you bid on an older home, read about heating systems, wells and septic and radon and arsenic testing. Tom can compare renovation loan options across Elite Mortgage Group's lenders once you know what the house needs.