When your current home is in a great neighborhood and close to work, friends and family, but the space doesn’t meet your needs, you have an option besides selling and moving. With home prices high in much of the country, it doesn’t always pay to move. The right renovations can help you stay in your current home and love the space again.

Conventional homestyle renovation loans allow you to borrow up to 95% of your home’s value for a remodel. This lets you really maximize your equity to complete the big projects like a whole house remodel, addition, or even adding a brand new accessory unit, or ADU.

Renovation loans have one catch – they are not for DIY projects. You won’t be able to complete any part of the project yourself. If that’s your goal, a cash out refinance may be a better option for you. You will need one contractor to handle the project from start to finish. They can hire subcontractors, but the contractor will need to prepare a detailed bid with all costs for the project broken down line by line. As work is completed, money is requested in draws and the lender will order an inspection before releasing the funds.

Renovation loans are available not only for your existing home, but also for purchasing and renovating a new home, vacation home, or single family investment property. Renovation costs are limited to 75% of the “as completed” value of the property.

The HomeStyle Renovation loan is available on 1-4 unit owner occupied properties, as well as 1 unit second homes, and single family investment properties. The minimum down payment for owner occupied homes is 5%, and your down payment will be based on the lesser of the purchase price + renovations, or the after improved value as determined by the appraisal.  

If you buy a home for $150,000 that needs $50,000 in repairs and updates, and an appraisal indicates that it will be worth $200,000 when complete, then your down payment amount will be based on $200,000.  

If you’re refinancing a property you already own, your maximum loan amount will be based on the appraised “after improved” value.  This is the amount the your property will be worth after all renovations are complete, and it will also be determined by an appraiser.  One thing to keep in mind with the HomeStyle Renovation loan is that the cost of renovations is limited to 75% of the total “as-completed” value of the property.  

There are a few reasons that all of your contractor bids are required to be completed during the loan process.  First, the appraiser will need the detailed  scope of work to understand what features the property will have after completion.  With this information they can properly select comparable properties in the area on which to base their as completed opinion of value.  Without a proper valuation and estimates of what the work will cost, the lender would not know how much to lend. 

Second, work must start within 30 days of loan closing, and must be completed within 6 months.  By doing much of the research upfront, and selecting a contractor before the loan closes, you’ll be ready to start construction as soon as your loan closes.  If you are planning to pursue a renovation loan for a new home purchase, it wouldn’t be a bad idea to start thinking of which contractors in your area you’d consider working with on your project before you’re under contract on the home.  This will help the loan process move more quickly and help to prevent missing deadlines in your sales contract. 

Due to the length of time it typically takes contractors to consult with you to prepare a bid and draw up plans, it is highly recommended that you write your purchase contract to allow additional time for appraisal and loan contingencies.  You will need to decide fairly quickly which renovations you’d like to do, including the types of materials and finishes you’d like in your new home.  Please allow yourself enough time for this process, and be sure your real estate agent communicates to the listing agent or sellers that it will be a longer escrow.