How to Finance Renovations When Buying a Home

Buying a home that needs work means answering a bigger question than just how to afford the purchase price. Can the renovation costs be included in the mortgage itself, and if so, how does that actually work? This guide walks through renovation mortgage programs, how much you can typically borrow, how lenders value the property, and what the entire process looks like from finding a fixer upper through final completion.

The typical journey looks like this: find a fixer upper, estimate the renovation, calculate the total project cost, review financing options, check eligibility, get a contractor bid, go through appraisal and underwriting, close, then move through renovation draws, inspections, and completion. Each of those steps connects to the next, so this guide covers the whole process rather than just defining renovation loans in isolation.

Builders Group Construction, works with buyers moving through exactly this kind of project, from early scope planning through the contractor bid a lender will actually want to see.

What Is a Renovation Mortgage?

A renovation mortgage can allow an eligible buyer to finance the home purchase and qualifying renovation costs within one loan structure, depending on the specific program.

Traditional mortgage: Purchase Price leads to Mortgage.

Renovation mortgage: Purchase Price plus Eligible Renovation Costs leads to Renovation Mortgage.

Not every renovation, property, or borrower qualifies for every program. Rules can vary based on property type, occupancy, location, renovation scope, borrower qualifications, the appraisal, contractor requirements, and program specific loan limits.

Major Renovation Financing Options

FHA 203(k) Loan

FHA 203(k) is one of the major renovation mortgage options available to buyers. The Standard 203(k) generally applies to more substantial renovation projects, while the Limited 203(k) is designed for eligible smaller scale improvements, subject to program rules. Key elements to understand include the purchase plus renovation concept, eligible improvements, contractor requirements, required inspections, the draw process, FHA underwriting, the appraisal, and program limitations. Always check current HUD requirements before assuming any specific eligibility detail still applies, since program rules can change.

Fannie Mae HomeStyle Renovation

HomeStyle is a conventional renovation financing option, covering home purchase plus improvements, eligible renovation work, contractor requirements, project documentation, the appraisal, as completed value, renovation funds, and conventional underwriting. It differs conceptually from FHA financing mainly in that it follows conventional loan rules rather than government backed requirements.

Freddie Mac CHOICERenovation

CHOICERenovation covers purchase and renovation financing together, with its own eligible property and improvement requirements, contractor and project requirements, an appraisal, renovation financing structure, and post improvement value considerations. Current Freddie Mac documentation should be reviewed before relying on any specific eligibility or financing rule.

USDA Renovation Financing

USDA related renovation financing can be relevant for eligible rural properties and borrowers, subject to program requirements. This covers rural property eligibility, the renovation or rehabilitation concept, property requirements, borrower requirements, contractor requirements, lender availability, and project limitations. Not every fixer upper qualifies for this program, since the property location and type both need to meet USDA rural eligibility rules.

Renovation Loan Comparison

Feature	FHA 203(k)	HomeStyle	CHOICERenovation	USDA Renovation
Purchase plus renovation	Yes, subject to program rules	Yes, subject to program rules	Yes, subject to program rules	Eligible transactions
Loan type	FHA backed	Conventional	Conventional	USDA backed
Property eligibility	Program specific	Program specific	Program specific	Rural and program specific
Renovation scope	Program specific	Program specific	Program specific	Program specific
Contractor requirements	Yes	Yes	Yes	Yes, where required
Appraisal	Required	Required	Required	Required
Draws and inspections	May apply	May apply	May apply	May apply
Key consideration	FHA requirements	Conventional requirements	Freddie Mac requirements	Rural eligibility

Verify current program requirements, limits, fees, and eligibility against official program documentation before relying on any of this for a specific transaction.

How Much Can You Borrow for Renovations?

This depends on the relationship between purchase price, renovation estimate, eligible project costs, contingency, appraised value, as completed value, and program specific financing limits.

A basic hypothetical example: a home purchase of $300,000, an eligible renovation of $60,000, for a total project of $360,000. The actual amount a lender may finance depends on the specific program, your qualification as a borrower, the appraisal, and applicable loan limits. A $360,000 total project does not automatically produce a $360,000 loan.

As Is Value vs. As Completed Value

This is one of the more important concepts in renovation financing.

As is value: the estimated value of the property in its current condition.

As completed value: the estimated value after the proposed renovation is completed.

The relationship: Current Property leads to Renovation Plan, which leads to Completed Property, which leads to Appraisal, which leads to As Completed Value.

Lenders can use this valuation information as part of underwriting, subject to the specific loan program. A higher projected future value does not automatically mean a buyer can borrow any desired renovation amount. Other underwriting and program requirements still apply on top of the appraisal.

How the Renovation Loan Process Works

Step 1, get pre qualified or pre approved: review income, credit, existing debt, available funds, and your estimated purchase budget.

Step 2, find the property: look for a home where the purchase price and renovation plan make financial sense together.

Step 3, develop the renovation scope: identify repairs, structural work, systems, cosmetic improvements, materials, and labor.

Step 4, select a contractor: obtain detailed estimates and verify licensing, insurance, and any program specific requirements.

Step 5, submit project documentation: depending on the program, this may include a contractor bid, scope of work, plans, specifications, cost estimates, and a timeline.

Step 6, appraisal: the property gets evaluated based on the proposed improvements and applicable valuation requirements.

Step 7, underwriting: the lender evaluates both you as the borrower and the project itself.

Step 8, closing: you close on the home and the financing together.

Step 9, renovation funds: eligible funds get held and released according to the program’s draw process.

Step 10, inspections and draws: progress may be inspected before each round of funds is released.

Step 11, final completion: required work and inspections need to be finished before the project is closed out.

What Renovations Can Be Financed?

Eligibility varies by program, so treat these as general categories rather than a universal list.

Structural improvements: framing, structural repairs, foundation related work where eligible, and roof work.

Building systems: electrical, plumbing, HVAC, and insulation.

Interior improvements: kitchen, bathroom, flooring, drywall, paint, cabinets, and fixtures. A kitchen remodeling or bathroom remodeling project often makes up a large share of a typical renovation mortgage scope.

Energy improvements: energy efficient systems, insulation, windows, and HVAC improvements.

Major renovations: larger projects may involve additional plans, inspections, permits, and documentation beyond what a smaller cosmetic project would require.

Renovation Budget: What Should Buyers Include?

Direct project costs: labor, materials, and contractor costs.

Professional costs: design work where applicable, engineering, design, and inspections.

Regulatory costs: permits, required inspections, and local fees.

Financing costs: loan fees, appraisal, closing costs, and other lender required expenses.

Contingency: a reserve that can help address eligible unexpected project costs, though its treatment depends on the specific financing program.

Renovation Budget vs. Cash Required

A buyer might have a $60,000 renovation budget but still need additional cash for costs that are not financed or for unexpected expenses. Potential cash requirements include the down payment, closing costs, inspection costs, the appraisal, non-financed improvements, moving expenses, temporary housing, cost overruns, and other reserves.

The renovation budget is not necessarily the same number as the cash a buyer actually needs available at and after closing.

What Happens If Renovation Costs Increase?

Change orders: additional work can change the project cost after the initial scope was set.

Contingency: an eligible contingency reserve may provide some protection against unexpected costs, depending on the program.

Additional cash: the buyer may need to contribute additional funds if costs exceed available financing and reserves.

Lender approval: some changes may require lender or program approval before work proceeds.

Contractor changes: switching contractors mid project can affect timelines, documentation, and financing requirements.

The exact solution depends on the loan program and your specific lender.

Renovation Loans vs. Other Financing Options

Financing Method	When It May Be Relevant	Main Consideration
Renovation mortgage	Buying a property that needs work	Purchase plus eligible improvements
Cash	Buyer has substantial available funds	Preserves no financing obligation for that amount, but uses liquidity
Personal loan	Smaller renovation needs	Separate unsecured financing may have different terms
HELOC	Existing homeowner with available equity	Usually requires ownership and equity first
Home equity loan	Existing homeowner with equity	Generally a post purchase financing option
Cash out refinance	Existing homeowner with equity	Replaces the existing mortgage
Construction financing	Larger construction projects	Structure and eligibility vary

A HELOC or home equity loan generally does not solve the same problem as a purchase and renovation mortgage when you have not yet purchased the home, since both require existing ownership and equity. Our separate guide comparing a home equity loan vs. HELOC vs. cash out refinance covers these post purchase options in more depth for anyone who already owns their home.

How to Choose the Right Renovation Financing

Consider the property’s location and whether it sits in an eligible area for your chosen program. Consider the property type and whether it fits the program’s rules. Think through occupancy, whether it will be your primary residence, a second home, or an investment property. Define the renovation scope, whether it is cosmetic, structural, or a major rehabilitation. Know your purchase price and your detailed renovation cost estimate. Understand the as completed value the property could reach after the improvements. Review your own qualifications, including income, credit, and debt. Consider how much cash you can contribute toward upfront and unexpected costs. Think through the timeline and whether you can manage the program’s contractor, inspection, and draw process.

Questions to Ask a Renovation Loan Lender

What renovation loan programs do you offer? Can the purchase and renovation be financed together? Which renovation types are eligible? How is the property valued? Is an as completed appraisal required? How are renovation funds held? How do draws work? What inspections are required? What contractor requirements apply? What happens if costs increase? How much cash will I need at closing? What fees should I expect? What happens if the project is delayed? What happens if the property cannot be occupied during construction?

Questions to Ask the Contractor

Is the scope of work detailed enough for the lender? Is the estimate itemized? Are permits included? What is the expected project timeline? What materials are included? What assumptions are built into the estimate? How are change orders handled? How will progress be documented? Does the contractor meet the loan program’s requirements? What happens if material prices change?

Fixer Upper Affordability

Purchase Price plus Renovation Cost plus Financing and Project Costs equals Total Project Cost. Compare that total against your household income, monthly debt obligations, down payment, cash reserves, expected mortgage payment, renovation timeline, and the property’s post renovation value. Avoid relying on simplistic affordability rules as universal standards, since renovation projects carry more uncertainty than a standard home purchase.

Common Mistakes

Underestimating the renovation: use a detailed scope rather than a rough guess.

Choosing the property before understanding financing: a property may not fit the requirements of your preferred renovation program.

Ignoring the completed value: the projected completed value can be an important part of the financing analysis.

Assuming every improvement is eligible: eligibility varies significantly by program.

Forgetting cash requirements: not every expense is necessarily financed.

Starting without a detailed contractor scope: vague estimates can create problems during underwriting and construction.

Ignoring cost overruns: build a realistic contingency and understand your lender’s rules before construction begins.

Treating program rules as permanent: government and conventional renovation programs can change, so current official requirements should always be verified.

If your project turns out to need more room than the existing structure can offer, our guide on second story addition vs. ground floor extension covers how that decision fits into a larger renovation budget.

Frequently Asked Questions