OneMain Financial: Can Renovation Costs Be Included in a Home Loan?

The term “home loan” is a category, not a specific type of loan. It’s sometimes used interchangeably with the word “mortgage,” so it’s easy to see why borrowers may get confused. Other loans that fall into this category include home improvement loans, home equity loans, and HELOCs. All of these allow for at least a percentage of renovation costs to be included.

Including Renovation Costs in a Mortgage

Certain types of mortgages are specifically designed for homeowners who want to improve their homes. One is the FHA 203(K) renovation loan for buyers planning to do a minimum of $5,000 in renovations. It’s designed for “fixer-uppers” and homes that have been significantly damaged by fire or flooding.

Fannie Mae offers a home loan called the “HomeStyle Renovation Mortgage.” Their main requirement is that the cost of the renovations cannot exceed 75% of the sum of the purchase price of the house and the renovation costs. It doesn’t sound very easy, but the math is relatively simple. The Homestyle Renovation Mortgage can also be used for refinancing.

Using Home Equity for Renovations

First mortgages are for home buyers looking to get into a property. Home equity loans, sometimes called “second” mortgages, are for homeowners who want to improve their property or create extra liquidity in their portfolio. They basically involve borrowing the equity already accumulated in the property to pay for renovations.

A home equity line of credit (HELOC) is a variation on the home equity loan. The premise is the same because the homeowner is borrowing against the equity in their house. The difference is that they only take what they need to pay for renovation costs as they arise instead of taking one lump sum as a loan. HELOCs are more flexible and typically better for ongoing projects with varying costs.

Applying for an Independent Home Improvement Loan

Certain renovations don’t require a second mortgage on the house. Instead, these are usually more suited to personal loans for a specific amount that are paid back in equal monthly installment payments. Interest rates are fixed, unlike HELOCs, which come with a variable interest rate. This makes home improvement loans easier for the borrower to budget.

Home improvement loans, because they’re personal loans, can be used for anything, despite their classification in the “home loan” category. Borrowers can ask for more than what they need if they like, but the lender will determine how much they can be approved for. Any additional balance can then be used by the borrower as they see fit.

Renovations Can Increase a Home’s Value

Homeowners can increase the value of their homes by taking out a mortgage that includes home renovations, a home equity loan or line of credit, or a basic home improvement loan. That makes them more of an investment than a liability. Most homeowners wait a few years after they buy their home before doing any major projects, but that delay isn’t required if they can find a way to finance it. There are plenty of lending options to help make home improvements right now.

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