Between the costs of planning, materials, and labor, today’s home renovations can be quite an investment. Fortunately, consumers don’t have to cover these costs directly out of pocket. In many cases, there are many lending options available to make the process more affordable. If you’re thinking about renovating, here are a few home loans you might consider and when they should be used.  

What Are Your Home Loan Options?

1. HomeStyle

Provided through Fannie Mae, HomeStyle loans can total as high as 75% of the home price plus renovation costs, making it a good option for those taking on major projects. While this financing can be used for any renovation project, borrowers will only get approved if they used a certified contractor, have a 620 credit score or higher, and make a down payment that’s 5% of the home’s purchase price.

2. FHA 203(k)

FHA 203(k) home loans are available to consumers with lower credit scores and require a minimum down payment of only 3.5%. Funds borrowed must be $5,000 or higher and held in an escrow account instead of going to the borrower.

Requirements for this loan include hiring a qualified 203(k) consultant and meeting specific energy-efficiency and structural standards set by the government. Depending on the circumstances, some rules limit when the home can be resold.

There are two types of FHA 203(k) loans to consider. Limited 203(k)s cover cosmetic improvements—such as bathroom remodeling or new flooring—of up to $35,000. Standard 203(k)s cover more expensive remodeling projects, but require complete oversight from a qualified consultant.  

3. Home Equity Options

Second mortgages, or home equity loans, provide a lump sum with locked interest rates that keep monthly payments the same. The amount given will depend on how much equity the homeowner can put up as collateral and the estimated property value.  

A HELOC, or home equity line of credit, functions in the same way but establishes a revolving balance that’s similar to a credit card. Compared to second mortgages, HELOCs are ideal for those with extended renovation projects or large payments over time.

4. Cash-Out Refinance

With this option, homeowners borrow an amount that’s higher than the original mortgage and get the difference in cash. Cash-out refinancing requires borrowers to have at least 20% equity in their homes and a credit score of around 640. In some cases, borrowers may be able to use this option to secure a lower interest rate than their original mortgage.

Figuring out which way to finance renovations can get confusing. That’s why loanDepot - Deuane Woodard, Loan Consultant of North Richland Hills, TX, takes a one-on-one approach to pinpoint the best solution—including home equity and FHA loans—for your budget and long-term goals. To learn more about home loans, visit this provider online. If you’d like to schedule a consultation, call (817) 875-6043.

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