These 5 Renovation Refinance Programs Are Better Than A Cash-Out Refi
Has your family outgrown your current home? Maybe you're tired of its dated style or it needs serious repairs.
Moving isn’t your only option. In fact, it may be your most costly. Selling your home often means giving up to 10% of your property’s value away to brokerage fees, taxes, and other transfer costs.
Instead, you may be better off using that equity to improve your existing home with a renovation refinance loan, an alternative to a cash-out refinance or HELOC.
What Is a Renovation Refinance Loan?
A renovation refinance lets you tap into your home’s equity for renovation purposes without the high rates and fees of a cash-out loan.
You get a renovation bid, then the lender wraps this amount into your new refinance loan. It’s considered a “rate-and-term” refinance, allowing for lower rates. higher loan-to-value, and easier qualification.
You have access to much more equity than with a cash-out refinance. Your loan-to-value is based on the future value, not current value.
Take care of any number of projects, including:
Adding bedrooms and bathrooms
Replacing the roof
Updating plumbing and electrical systems
Modernizing kitchens and bathrooms
Upgrading energy-efficient appliances
Removing walls and opening up spaces
With some programs, you can even use the money to spruce up your home’s exterior and put in an inground pool.
By opting for a renovation refinance, you can avoid costly selling expenses and potentially increase your home's value at the same time.
Renovation Refinance Loan Programs
Most lenders offer some type of renovation refinance loan. The most popular options, however, are conventional programs through Fannie Mae and Freddie Mac and one backed by the Federal Housing Administration.
Fannie Mae HomeStyle Renovation
Fannie Mae HomeStyle Renovation is a flexible program that allows you to make just about any improvement. Depending on your property, you may be able to refinance up to 97% of your home's anticipated after-repair value.
Borrower requirements may be stricter than government-backed FHA renovation refinances, but homeowners with very good or excellent credit may find the best value with HomeStyle Renovation loans.
Eligible Properties: Primary residences, second homes, and investment properties. Primary residences can have up to four units, while second homes and investments are limited to single-family.
Maximum Loan-to-Value: HomeStyle Renovation loans are based on the after-repair value of your home. The percentage that you can borrow depends on the type of property you’re refinancing. The renovations can cost up to 75% of the home's after-repair value.
Property Type: | Maximum Loan-to-Value: |
Single-Unit Primary Residence | 97% |
Multi-Unit Primary Residence | 95% |
Second Home | 90% |
Single-Unit Investment Property | 75% |
When combined with the Community Seconds program, you can have a maximum loan-to-value of 105%.
Minimum Credit Score: 620
Maximum Debt-to-Income Ratio: 45%
What Improvements Are Allowed? You can make almost any improvement that is permanently attached to your property. This can include additions, repairs, and renovations. You can even purchase appliances for rooms you're doing major work on. Inground pools, accessory dwelling units, and detached garages are also allowed.
How Long Can Repairs Take? You have 15 months to complete repairs after closing on your refinance.
Can I Do Work Myself? Borrowers with single-unit properties can complete do-it-yourself renovations which account for up to 10% of the home's total value. You can use renovation funds to pay for supplies but not for your labor. However, not all lenders allow DIY work.
Contractor Requirements: You can choose any licensed contractor, but the lender must approve your selection. You will likely need to obtain a Contractor Profile Report for the lender to evaluate.
Required Reserves: Most single-family primary residences won't need a contingency reserve. On other types of properties, a reserve equal to up to 15% of improvement costs may be required. You can fund this yourself or include it as part of your loan.
Freddie Mac CHOICERenovation
The Freddie Mac CHOICERenovation program is similar to Fannie Mae’s HomeStyle Renovation. Many lenders may offer one type of loan or the other. For most homeowners, the differences will be negligible. However, distinctions such as do-it-yourself rules and loan-to-value limits may impact some borrowers.
Eligible Properties: Primary residences, second homes, and investment properties. Primary residences can have up to four individual units, while second homes and investments may only be single-family.
Maximum Loan-to-Value: Like other renovation refinance programs, Freddie Mac CHOICERenovation loans are established by your home's after-repair value. Loan-to-value limits are based on the property type you're refinancing, and renovation funds can be up to 75% of the home's final value.
Property Type: | Maximum Loan-to-Value: |
Single-Unit Primary Residence | 97% |
Two-Unit Primary Residence | 85% |
Three- or Four-Unit Primary Residence | 80% |
Second Home | 90% |
Single-Unit Investment Property | 85% |
When combined with the Affordable Seconds program, you can have a maximum loan-to-value of 105%.
Minimum Credit Score: 620
Maximum Debt-to-Income Ratio: 45%
What Improvements Are Allowed? Funds can be used on just about any permanent home improvement project. You could add a bedroom, update your kitchen and bathrooms, or install an in-ground pool. Want to improve your home’s energy or water efficiency? Those are great options for CHOICERenovation refinances.
How Long Can Repairs Take? You have 450 days to complete repairs after closing on your refinance.
Can I Do Work Myself? Only if you’re a professional who is licensed and qualified to act as a general contractor or complete the planned renovations.
Contractor Requirements: You may choose the contractor, but your lender will need to approve your selection. Refinancing with a CHOICERenovation loan also allows you to have renovation services completed by a home improvement store.
Required Reserves: In most cases, you’ll need a contingency reserve of 10% of the estimated improvement costs. This could be as high as 20% in some situations. You can fund the reserve yourself or wrap it into your refinance.
FHA Standard 203(k)
The FHA Standard 203(k) renovation refinance is a government-backed loan that lets most borrowers refinance up to 97.75% of their property's value. FHA loans are open to homeowners with a higher debt ratio or lower credit score than conventional mortgages. Borrowers with fair or poor credit will get better rates and lower mortgage insurance costs with an FHA 203(k) refinance.
Eligible Properties: Single-unit and multi-unit primary residences. Second homes and investment properties do not qualify for FHA loans.
Maximum Loan-to-Value: FHA 203(k) loans are based on your property's after-repair value. Borrowers with a credit score of at least 580 can borrow up to 97.75%. If you have a credit score between 500 and 579, you can refinance up to 90% of your home's anticipated future value.
Minimum Credit Score: 500
Maximum Debt-to-Income Ratio: 50%
What Improvements Are Allowed? You can complete nearly all major home improvements and repairs with an FHA Standard 203(k) renovation loan. The most significant difference between the FHA and conventional programs in this area is that the FHA 203(k) doesn't allow luxury additions such as a new in-ground pool.
How Long Can Repairs Take? Repairs must be completed within nine months with the limited program and within twelve months for the standard program.
Can I Do Work Myself? FHA guidelines allow for do-it-yourself improvements in some cases. Still, most lenders will only approve 203(k) loans when you use a professional contractor.
Contractor Requirements: You can choose your contractor, but they must be licensed and supply a list of references. For larger projects, you must choose an approved FHA 203(k) consultant to oversee the project.
Required Reserves: For homes under 30 years old, you aren't likely to need a reserve unless there's documented termite damage. In that case, the required reserve is 10%. Homes that are 30 years old or more require a 10% reserve. If the property doesn't have operable utilities, that figure increases to 15%. In some cases, lenders may require reserves as high as 20%.
Small Renovation Refinance Loans
Not planning a total home makeover? You have other options for your renovation refinance if you only need to fund minor repairs. The Freddie Mac CHOICEReno eXPress and FHA Limited 203(k) programs allow you to make smaller-scale improvements with a more straightforward process than standard renovation refinance loans.
Freddie Mac CHOICEReno eXPress
The Freddie Mac CHOICEReno eXPress program allows you to include improvements up to 10% (15% in certain areas) of your property’s after-repair value. This is perfect for smaller projects like renovating a bathroom, repairing a roof, or adding accessibility features to your home.
Apart from renovation limits, CHOICEReno eXPress guidelines are similar to Freddie Mac’s CHOICERenovation mortgage. There are, however, a few noteworthy differences:
You have 180 days to complete improvements
You won’t need a contingency reserve in most cases
You can’t use the loan to pay off short-term financing that you previously took out to fund repairs.
FHA Limited 203(k)
With an FHA Limited 203(k), you can borrow up to $75,000 to fund improvement projects. Unlike the Standard 203(k) loan program, the Limited 203(k) doesn't allow for structural repairs or additions to your home. It’s mainly for cosmetic fixes.
Need work done that will take a while to complete? The FHA Limited 203(k) program doesn’t allow projects that would keep you from living in your home for more than 15 days.
Renovation Refinance vs. Cash-Out Refinance
Renovation and cash-out refinances both allow you to use your property's equity to fund repairs, additions, and other improvements. But apart from that, there are some critical differences between the two loan types.
Renovation Refi: Maximum Loan Based On Higher Value
Renovation refinance loans are based on the after-repair value of your property. Conversely, cash-out refinances go by your home’s current appraised value.
Say you have a home that currently appraises for $250,000 but will be worth $400,000 once you complete your planned projects. If you opt for a cash-out refinance, the equity you can tap into is based on the current $250,000 valuation. If you opt for a renovation refinance loan, you could finance improvements based on the home’s future $400,000 price tag.
Renovation Refi Comes With More Rules About Use of Funds, Limits DIY
With a cash-out refinance, you receive your cashed-out equity as a lump sum after closing. The funds are yours to do with as you see fit – you can spend them however you want. With a renovation refinance, however, the funds are held in an escrow account and released directly to home improvement contractors as they complete their scheduled work.
If you plan to use licensed contractors for all improvements, both loan types will fit the bill. But in practice, only the Fannie Mae HomeStyle Renovation program allows homeowners to complete work themselves (and even then, for no more than 10% of the property’s final value). Do-it-yourself individuals may opt for the flexibility of a cash-out refinance.
Renovation Refis Come With Lower Rates
Even though you're using your home's equity to fund improvement projects, renovation refinance loans are priced like rate-and-term (no-cash-out) refinances. This can often mean a 0.25% to 0.50% savings over cash-out refinance interest rates.
Sometimes, this difference can be even bigger. However, even half a percentage point can noticeably impact your mortgage.
For example, a 30-year $300,000 renovation refinance at 6% interest would equate to roughly $1,800 monthly payments. With a 6.5% cash-out refinance, that loan would cost nearly $100 more per month, coming in at just under $1,900.
Find the Right Renovation Refinance Loan for Your Home
Renovation refinance loans are great tools for tapping into home equity for major repairs and improvements. But not all programs are the same. Depending on your existing equity, funding needs, and financial profile, some refinancing options may be better than others.
For an expert evaluation of how each renovation refinance option could work for you, contact a qualified lending professional.
Tim Lucas is the editor and Lead Analyst for MortgageResearch.com. Tim spent 11 years in the mortgage industry and now leverages that real-world knowledge to give consumers reliable, actionable advice. He has been featured in national publications such as Time, U.S. News, MSN, The Mortgage Reports, and more.
