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Renovation Loans: Finance Your Home Improvement Dreams

Renovation Loan

Home renovation loans provide you with funds to buy and fix up a home in Louisiana. Despite the renovation portion of the loan, it’s still a mortgage. You apply for one loan and have the money to buy the home and complete agreed-upon renovations. 

The type of loan you choose determines what you need to qualify for it. We describe each type below. 

Renovation Loan Basics

All renovation loans that we offer have a few things in common:

  • Single-close loans with only one monthly payment
  • Money to buy the home and pay for renovations
  • Loan-to-value ratios based on the after-improved value

Types of Renovation Loans

Just like standard home purchase loans in Louisiana, there are conventional and government-backed renovation loan options too. 

FHA 203K Loans

Just like the standard FHA loan, the FHA 203K loan has flexible underwriting guidelines, but it includes money to renovate the home. The FHA offers a standard 203K loan and a streamline 203K loan. The standard loan helps pay for major renovations, including structural repairs. The streamline 203K loan covers minor renovations, mainly cosmetic repairs that cost less than $35,000 and aren’t structural. The FHA 203K programs are only applicable for owner-occupied properties. All work must be completed within 6 months.

USDA Escrow Holdback Loan

The USDA offers an option for homes that don’t pass the USDA appraisal requirements. The USDA Escrow Holdback loan allows up to 10% of the loan amount in repairs, as long as the repairs are minor. In other words, you must be able to reside in the home while the repairs are completed. Contractors/homeowners have up to 180 days after the closing to complete the work.

VA Rehab Loan

The VA Renovation Loan helps veterans buy homes that don’t pass the VA minimum requirements. As the housing stock ages, it becomes harder to find homes that meet the qualifications. The VA Renovation loan provides the funds to buy and renovate the home so that it meets the VA minimum property requirements. The program is strictly for renovations and repairs approved by the VA, such as roofing, flooring, or foundation repairs.

Fannie Mae HomeStyle Loans

The Fannie Mae HomeStyle loan is the conventional version of the home renovation loan. Also a single-close loan, you can borrow enough to buy and renovate a primary residence as well as second or investment homes. Borrowers with good credit and low debt ratios prefer this option because it has lower mortgage insurance premiums and fewer restrictions. Fannie Mae HomeStyle repairs must be completed within 12 months.

Qualifying for Renovation Loans

Each renovation loan program in Louisiana has different qualifying requirements. Knowing what you need to qualify can help you choose the right program.

FHA 203K Loan Requirements

  • At least a 580 credit score 
  • Maximum housing debt ratio of 31% 
  • Maximum total debt ratio of 50% 
  • Steady income and employment for the last two years
  • Proof of owner occupancy

USDA Escrow Holdback Requirements

  • At least a 640 credit score 
  • Decent credit history
  • Maximum housing ratio of 29%
  • Maximum total debt ratio of 41%
  • Stable income and employment for the last two years
  • Proof of owner occupancy

VA Renovation Loan

  • At least a 620 credit score (for most lenders)
  • Maximum total debt ratio of 41%
  • Stable income and employment for the last two years
  • Enough disposable income to meet the requirements for your location and family size
  • Proof of owner occupancy

Fannie Mae HomeStyle Loan

  • Minimum 620 credit score
  • Maximum housing ratio around 28%
  • Maximum total debt ratio around 36%
  • Stable income and employment for the last two years

Renovation Loan Terms and Down Payment Requirements

Each loan program has its own down payment requirements. 

Standard FHA 203K 

Both the standard and streamline FHA 203K loans require a 3.5% down payment. You must put down 3.5% of the total purchase price plus the cost of renovations. For example, if you buy the home for $150,000 and have a home renovations contract for $20,000, you’d need a down payment of $5,950.

USDA Escrow Holdback Loan

The USDA Escrow Holdback Loan, just like the standard USDA loan doesn’t require a down payment. You can borrow up to 100% of the sales price, plus up to 10% of the final loan amount or the necessary repairs.

VA Rehab Loan

The VA also doesn’t require a down payment for the VA rehab loan. You can borrow up to 100% of the home’s appraised value, plus the cost of the renovations. Each lender has a different maximum amount you can borrow for renovations. It varies by lender, but we can help you find the lender that suits your needs.

Fannie Mae HomeStyle Loan

Fannie Mae requires at least a 3% down payment for the HomeStyle loan. The 3% down payment is determined by the after-repaired value of the home. This is the value the appraiser predicts for the home based on the determined repairs.

How Much Can You Borrow for a Renovation Loan?

The amount you can borrow depends on the loan program and is as follows:

Standard FHA 203K 

The FHA has loan limits in place based on the average home price in the area. Each area of Louisiana has an FHA loan limit of 115% of the average home price. The FHA does have floor and ceiling limits set though:

  • Floor or minimum loan amount limit $314,827
  • Ceiling or maximum loan amount limit $726,525

The FHA allows you to borrow the lesser of 110% of the property’s after-repaired value or the sales price plus repair costs. 

USDA Escrow Holdback Loan

The USDA doesn’t have maximum loan amounts in writing. Instead, they base your maximum payment on your qualifying income. Your housing payment can’t exceed 29% of your gross monthly income. Lenders work your maximum loan amount from the maximum payment you qualify to receive based on your gross monthly income.

For the repair portion of the loan, you can borrow up to 10% of the final loan amount. The 10% must include enough to cover the cost of the repairs plus a contingency reserve. 

VA Rehab Loan

The VA allows veterans to borrow up to $484,350, assuming they have the entitlement to borrow that much. Your entitlement is 25% of the loan amount. If you have full entitlement (you haven’t used any yet), you have $121,087 in entitlement, which provides up to a $484,350 loan.

The VA allows a maximum loan amount that is the lesser of:

  • The home’s acquisition cost
  • The home’s after-repaired value

The acquisition cost is the home’s sales price plus the repair costs, contingency reserve, and any other related fees (title, inspection, and permits).

Fannie Mae HomeStyle Loan

Fannie Mae has a maximum loan amount of $484,350. For the rehab portion of the loan, the renovations may not exceed the lesser of 75% of:

  • The home’s sales price plus the cost of renovations
  • The after-repaired home value

Making the Repairs With Renovation Loan Funding

Home renovation loans have a unique aspect. You aren’t just paying the Louisiana seller for the home. You also borrow money to pay contractors to complete the work for you. For any program, the contractors must be licensed and insured. You should also ensure that they have the time to complete the repairs within the loan program’s allotted time as described above.

Each loan program requires you to submit contractor bids prior to final loan approval. The appraisal uses the bids to complete the after-repaired value estimate. The lender then uses that figure to determine your loan amount. 

At the closing, the closer disburses funds to the seller and any related third parties, such as title companies and attorneys. The lender then holds the escrow funds in accordance to the agreed-upon contract. Some lenders disburse up to 50% of the funds at the closing to allow for purchase of initial supplies and to start the work within the allotted time. From there, lenders set pre-determined dates to inspect the completed work and disburse funds. The final disbursement isn’t made until all work is complete and approved.

Types of Allowed Repairs

Each loan program has different requirements and allowances for repairs:

FHA 203K Loans

The FHA 203K loan allows many repairs, including structural repairs. A sampling of what you can do with it includes:

  • Structural repairs/renovations
  • Room additions
  • Accessibility renovations
  • Remodeling bathrooms or kitchens
  • Repairing or replacing roofing
  • Repairing or replacing flooring
  • Adding garage or carport
  • Upgrading or repairing plumbing or electrical systems
  • Fixing health hazards
  • Adding a porch or patio
  • Knocking down or adding walls
  • Installing energy-efficient equipment

FHA 203K Streamline Loans

The FHA Streamline loan doesn’t allow for any structural repairs. A sampling of the allowed repairs includes:

  • Roofing repair or replacement
  • Window or door repair or replacement
  • Repair or replacement of HVAC, electrical and plumbing systems
  • Repair or replacement of flooring
  • Painting
  • Accessibility improvements
  • Adding decks or porches
  • Basement remodel (nothing structural)

USDA Escrow Holdback Loans

The USDA Escrow Holdback loan helps pay for any repairs that help the home pass the USDA appraisal. The USDA does not allow any structural renovations, foundation repairs, or repairs to the electrical or plumbing system. The USDA also doesn’t allow repairs that would make the home livable – you must be able to live in the home immediately after the closing. 

VA Rehab Loans

 The VA only allows ‘VA-approved’ repairs or renovations. The point of the repairs or renovations is to make the home livable and to meet the VA requirements. This isn’t a loan for cosmetic changes. Each lender differs, but you can typically do any of the following repairs:

  • Roofing
  • Flooring
  • HVAC, electrical and plumbing systems
  • Removing lead paint
  • Foundation repairs
  • Making the home energy efficient

Fannie Mae HomeStyle Loans

 The Fannie Mae HomeStyle loan has the most flexible guidelines. Fannie Mae doesn’t require specific repairs or have limits. They do request that all improvements be a permanent part of the property or land with the exception of appliances. The only restriction the HomeStyle loan has is that you can’t tear down and rebuild a home with this loan.

Do-It-Yourself Renovations

All loan programs require a licensed and insured contractor to do the work. However, if you can prove that you have the knowledge and tools to do the work, some loan programs do allow DIY renovations. 

  • FHA 203K – The FHA requires proof that you are qualified, trained, and capable of completing the repairs on time. Approval is on a lender-by-lender basis.
  • USDA Escrow Holdback – You may be able to do some of the repairs yourself if they total less than 10% of the property value and total less than $10,000.
  • VA Rehab – The VA requires contractors to complete the work.
  • Fannie Mae HomeStyle – You can conduct repairs that don’t exceed 10% of the after-repaired value of the home

 Bottom Line

Each home renovation loan provides funds to buy and fix up a home. It’s a great way to keep your closing costs to a minimum and only have one mortgage payment each month. If you want to learn more about your home renovation loan options, give us a call today!

About The Author

Channing Moore

Channing is the owner of Bayou Mortgage. He is passionate about empowering people through education and training to own a home. In his spare time you can catch him at church, reading a book or working on his latest project.

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