A mortgage that includes funds for repairs or upgrades to the home, rolled into the loan balance. Common examples: FHA 203(k) and Fannie Mae HomeStyle.
A renovation loan lets you finance the purchase (or refinance) of a home plus the cost of renovating it, all in one mortgage. The most common programs are FHA 203(k) (for FHA-eligible buyers) and Fannie Mae HomeStyle (conventional).
The loan amount is based on the home's projected after-renovation value, not its current as-is value. At closing, the renovation funds go into a holding account and get released to your contractor as work is completed, similar to a construction loan.
Renovation loans require detailed work plans, licensed contractors, and inspections at each draw — there's more paperwork and the process takes longer. But for a fixer-upper, this is often the only way to finance both the purchase and the repairs together with one mortgage.
Example
You find a $300K home that needs $80K of work. A renovation loan rolls both into one $380K mortgage based on the projected $450K after-renovation value. At closing, you own the home; over the next 6 months, the lender releases $80K in draws as the contractor completes work.
Also known as
FHA 203(k) loan, HomeStyle loan, rehab loan, fixer-upper loan
Source:
HUD 203(k)