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At the start of 2025 in many markets around the country there may be a lack of housing inventory with buyers competing for any available properties. In many ways, now, more than ever, it’s appropriate to consider using a renovation loan with a home purchase which adds funds to repair, update, or increase the size of a home into the same mortgage.

I want to explain the concept and structure of using a renovation mortgage when purchasing a new home.

Basically, the math works like this –

  • Purchase Price + Renovation Cost = Total Transaction Cost

The total transaction cost is then subject to a minimum down payment the various renovation mortgages may require. The amount left after down payment becomes the total single mortgage on the property. In this way a buyer has financed the cost of buying the home along with renovation costs into the same, single mortgage, with one monthly payment that includes the renovation cost. All renovation work begins immediately after closing on the sale of the property.

There are several renovation mortgages that allow the addition of dollars to do most any type of repairs, updates, upgrades, modernization or even room additions to these properties. The condition of the homes can be so extreme that they cannot now be safely lived in, but a renovation mortgage provides funds from the beginning to restore most any property to safe and livable condition.

The result is the purchased home can include all the updates, structural repairs, or most anything else the buyer might want to add that is permanently affixed to the home. The benefit is the buyer enjoys the updates now rather than saving up for them over an extended period of time or having to do the work themselves. All renovation work must be done by licensed professionals. Additionally, often the improvements can increase the value of the property when competed.

The second part of the math that is key for renovation loans is After Renovated Value or ARV. This ARV is based on the purchase price plus cost of the repairs and updates as compared, by a local Appraiser, to recent sales of similar sized properties in the area that have already been renovated. The ARV is key to mortgage underwriting approval with all the different renovation mortgages. Generally, if there is no increase in After Renovated Value with the cost of the improvements, it may be the property is overpriced, or the cost of improvements is too high for the property. ARV is determined prior to underwriting loan approval with an Appraiser report.

Here are 12 examples of what my clients have done with renovation mortgages –

  • Purchase of a HUD foreclosed and damaged single family to restore it with an FHA 203k for a first time buyer
  • Purchase of a 2 unit property that needed just a new roof and siding repair using an FHA 203k
  • Purchase of an estate sale home with HomeStyle Renovation that needed updating and modernization throughout the home
  • Purchase of a very damaged 2 unit with an FHA 203k to restore it – the owner lives in one unit and rents out the other
  • Investor client bought an old single family house to renovate and lease to a tenant with Choice Renovation which allows Investors who will lease out the home to tenants after renovation is complete – owner will not live there
  • Purchase of a 2 unit building with a single family coach house in the back with Choice Renovation for funds to restore all 3 living units- owner lives in one and rents the others
  • Purchase of a 4 unit building with an FHA 203k to complete a unit that was torn apart and never finished by the seller – the owner lives in one and rents the other three to tenants for cash flow to pay the mortgage
  • Purchase of a mid-century single family home to have an addition put on and modernize the home with Choice Renovation
  • Using an FHA 203k to refinance & replace an original purchase mortgage on a house bought two years earlier to update it for the owners – renovation loans can be used to pay off a current mortgage, replace it with one that also has funds to pay for a renovation, leaving only the one renovation mortgage payment each month
  • First time buyer purchased a vacant home that was only partially livable and used the FHA203k to provide funds to add HVAC, new windows, flooring, electric wiring and paint
  • Client used Choice Renovation to buy an old 3 unit, renovate it and add a 4th unit in the basement – now owner has 3 units generating rent to pay the mortgage and lives for free in the fourth unit
  • Using Choice Renovation a client was able to finance the renovation of a 2 unit property he had inherited with no mortgage for himself to live in one unit and lease the other – all renovation mortgages can be used on a currently owned property to provide funds for updates and remodels the owner wishes to pay for by placing a renovation mortgage on the property

By using a renovation loan when you first purchase a single family home, condo or 2 to 4 unit small apartment building, you may be able to find an old property you like, in a location you prefer and make it into your dream home. Or use a renovation mortgage on your current home to pay for updates, repairs or remodeling etc.

The different renovation mortgages are listed below –

  • FHA 203k Limited & Standard for 1 to 4 unit owner occupied properties
    • 203k Limited is for renovation costs of no more than $75,000
    • 203k Standard is for renovation cost exceeding $75,000
  • Conventional Choice Renovation for owner occupied 1 to 4 unit properties and Investor owned 1 unit properties
  • Conventional HomeStyle Renovation for owner occupied 1 to 4 unit properties and Investor owned 1 unit properties – In 2023 HomeStyle reduced the minimum down payment for owner occupied 1 to 4 unit properties to 5%
  • VA Renovation for 1 unit owner occupied properties for Veterans and eligible active duty personnel with no down payment required for qualified borrowers

What questions do you have for me ?

Loan approval and terms are dependent upon borrower’s credit, documented ability to repay, acceptability of collateral property, and underwriting criteria. Down payment and terms shown are for informational purposes only and are not intended as an advertisement or commitment to lend. Please contact us for an exact quote and for more information on fees and terms. All loans subject to credit approval. Rates and fees subject to change. Not all borrowers will qualify. For licensing information, go to: www.nmlsconsumeraccess.org. 4305 N. Lincoln Ave., Office D Chicago, IL 60618

Perry Farella NMLS ID755943

FCM NMLS ID 629700

Perry Farella    773 793 8803

Perry.Farella@fcmhomeloans.com     PerryFarella.com