Definition
Renovation loans combine purchase and renovation financing, similar to 203(k) loans but sometimes with fewer requirements. Conventional renovation products may accept new construction and have less documentation than FHA programs.
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Renovation loans allow borrowers to include estimated improvement costs in their mortgage, used when purchasing properties that need work. Conventional renovation products often have fewer requirements than FHA 203(k) loans and may accept new construction as well as rehab. Some programs release funds as draws; others provide one-time funding. Renovation loans are particularly useful in markets with limited inventory of move-in-ready homes, allowing buyers to purchase below-market priced properties and upgrade them.
Pro Tip
Compare FHA 203(k) versus conventional renovation loans; conventional may require less documentation but may cost more in interest rates.
Example
A conventional lender offers a renovation mortgage where you borrow $250,000 for the home purchase and $50,000 for updates, with funds released in two draws.