How to Add Renovation Costs Into Your Mortgage

Updated: Dec 28, 2021

As the real estate market continues to experience record-low mortgage and interest rates, many prospective buyers could become frustrated.

As the real estate market continues to experience record-low mortgage and interest rates, many prospective buyers could become frustrated. With many sellers receiving higher-than-ask, multiple offers, another option is to pursue a home renovation or remodeling project. With both requiring more upgrades, repairs, and maintenance, purchasing a home that needs work could be the ticket to your customized dream home.

Can You Include Renovation Costs In A Mortgage

When renovating a home, leverage is key-and the less out of pocket you are likely to be, especially in a low-interest-rate environment. Even if you're an investor with a substantial amount of cash for the project, debt is still an issue.

There is likely a renovation loan that allows you to include renovation costs in your mortgage. Depending on your needs, the intended use of the property, the size of the project, and your qualifications, you may need to consider different financing options.

Why Renovation Costs Are Added To Mortgage

A home renovation project can cost $100k or more than working through an entire wishlist of projects, and this means that there's often a need to look at financing options to cover this cost. Here are some of the reasons why homebuyers and homeowners often want to add renovation costs to their mortgage, rather than take out a second mortgage.

If you are renovating a home and don't have equity in the property, it can be difficult to access the borrowing power that you need to carry out the work. If you haven't bought the property yet, you may need to combine the renovation costs with your mortgage to access extra borrowing power.

One of the most common reasons people choose to combine renovation costs with their mortgage is so that they're only taking out a single loan and making one monthly payment. However, options that let you combine these costs come with a higher interest rate than a mortgage that only covers the cost of the property.

Options For Adding Renovation Costs To Your Mortgage

FHA 203(k) renovation loans are used by borrowers who are purchasing a fixer-upper or "handyperson special" that requires repairs, upgrades, and renovations. Whether work is completed by licensed professionals or on your own, this facilitates the necessary funding for the home purchase and accompanying renovations. The loans are insured and backed by the Federal Housing Administration (FHA).

The Federal National Mortgage Association, also known as Fannie Mae, offers its HomeStyle Renovation Mortgage option. The original principal cannot exceed the association's maximum mortgage amount for a conventional primary mortgage. The transaction type also plays a role in how much is covered. Borrowers purchasing a home cannot incur rehab costs of more than 75%, according to the HomeStyleRenovation Mortgages Loan and Borrower Eligibility requirements.

Homestyle Renovation Mortgage

A renovation escrow account is set up under the HomeStyle Renovation Mortgage program to hold the portion of the loan set aside for repairs. The financial institution keeping the money pays for the renovations with a check written jointly to the buyer and contractor. The escrow account accrues interest, and any leftover cash may be used for non-essential repairs or applied against the principal balance of the mortgage.