Jamie Johnson 
Key Takeaways:
- You can roll renovation costs into your mortgage through loan programs like the FHA 203(k) and Fannie Mae HomeStyle loans.
- The right financing method depends on how much equity you have and whether you want to take on a new monthly payment.
- Options like a home equity agreement (HEA) don’t require any monthly payments and come with flexible qualification requirements.
The cost of renovations can add up quickly, whether you’re buying a fixer-upper or updating your current home. This causes many homeowners and buyers to wonder, can you add renovation costs to a mortgage?
The short answer is yes, but how you do it depends on your situation and needs. This article breaks down the most common ways to finance renovations and how to choose the approach that best fits your budget and goals.
Why Roll Renovation Costs into a Mortgage?
If you’re like many homeowners, rolling the renovation costs into your mortgage makes the most sense. You receive a single loan and one monthly payment, which simplifies your finances. Plus, mortgage interest rates tend to be much lower than what you’d receive on a credit card or personal loan.
If you’ve just purchased your home, you likely won’t have enough equity built up to tap into traditional home equity solutions. Rolling your renovation costs into your mortgage allows you to make changes faster and start increasing the equity you have in your home.
And finally, you may also be able to take advantage of the mortgage interest deduction. This allows you to deduct any interest paid on the portion of your mortgage used to substantially improve the home. It’s a good idea to consult with a tax professional to determine whether it applies to your situation.
Several loan options allow you to roll renovation costs into your mortgage, but the right one depends on your situation. FHA 203(k) loans tend to be the most accessible, with lower credit scores and down payment requirements. They’re designed for primary residences and work well for buyers who need to finance essential home repairs.
In comparison, Fannie Mae HomeStyle loans offer more flexibility for borrowers with strong credit and a larger down payment. They allow you to finance second homes and investment properties, and cover nearly any home improvement. Construction loans are the hardest to qualify for, and they’re designed for more extensive projects, like full rebuilds.
Options for Adding Renovation Costs to a Mortgage
| Loan Type | Minimum Credit Score | Minimum Down Payment | Property Types | Renovation Types | Works Best For: |
| FHA 203(k) | 580 | 3.5% | Primary residence only | Structural repairs, remodels, HVAC, and roofing. | First-time buyers with lower credit. |
| Fannie Mae HomeStyle | 620 | 5% for primary homes; 10-15% for second homes and investment properties | Primary homes, second homes, and investment properties | Any improvement permanently affixed to the property, including luxury upgrades. | Buyers with stronger credit who want more flexibility. |
| Construction loan | 680+ | Between 20-25% | Primary homes, second homes, and investment properties | Major renovations or full rebuilds. | Major rehabs, investment properties, and second homes. |
Financing Options for Renovations that Don’t Affect Your Mortgage
If you own your home and have built up substantial equity, you have other options for financing your home renovations. A home equity line of credit (HELOC) gives you access to a maximum credit limit you can draw from on an as-needed basis. The draw period usually lasts 10 years, and during that time, you’ll only pay interest on the amount you actually borrow. A HELOC is a good option for projects where you don’t know the full extent of the costs.
With a home equity loan, you’ll receive a lump sum upfront, which you repay in monthly installments. This makes it a better option for projects with a defined budget. But with both a HELOC and a home equity loan, your home serves as collateral, so you’ll need a good credit score and sufficient equity to qualify.
If you’re hoping to avoid taking on a new monthly payment, a home equity agreement (HEA) could be a good option. You’ll receive a lump sum in exchange for a share of your home’s appreciation, with no monthly payments. You’ll settle the HEA when you sell your home, refinance, or reach the end of the agreement term.
Because an HEA is based primarily on the value of your home, it can be more accessible to homeowners who may not qualify for a HELOC or home equity loan. For instance, Unlock’s HEA doesn’t have any income requirements and homeowners with credit scores starting at 500 may qualify.
Special Scenarios: Investment Properties and Second Homes
If you’re trying to finance renovations on a second home, you’ll have fewer options to pick from since most mortgage renovation programs are limited to primary residences. If you have enough equity in your home, a cash-out refinance or HELOC could work, though your interest rates will be higher. Some HEA providers, including Unlock, offer agreements on second homes, so this could be a flexible alternative.
For investment properties, fix-and-flip loans are designed for investors who plan to buy, renovate, and sell the property. These loans cover both the purchase and renovation costs based on the property’s after-repair value. If you plan to hold the property as a rental after renovating, a debt service coverage ratio (DSCR) loan is another option worth exploring. This loan qualifies borrowers based on rental income rather than their personal income, which makes it a good fit for self-employed investors. Some HEA providers, including Unlock, also work with investment properties, though the eligibility varies by company.
Choosing the Right Option
New homebuyers have fewer options when it comes to financing renovations since they don’t have any equity to draw from. Renovation mortgages like the FHA 203(k) or Fannie Mae HomeStyle loan are likely your best bet since they let you roll the purchase price and renovation costs into a single loan.
If you already own a home and have significant equity built up, a HELOC or home equity loan could be a good choice, depending on your situation. A cash-out refinance or renovation mortgage refinance may still be an option, but your borrowing power will be more limited. And keep in mind that a cash-out refi means replacing your existing mortgage with a new one. If you already have a low interest rate and want to keep it, this probably won’t be the best choice.
If you want to access your equity without taking on a new monthly payment, an HEA could be a good fit. You’ll receive a lump sum in exchange for a share of your home’s future value, and the qualification requirements are more flexible than those for a traditional loan.
Conclusion
Whether you’re buying a fixer-upper or updating your current home, you have options when it comes to financing the renovations. The right option depends on your equity and how much flexibility you need. Take time to compare your options since your financing choices will impact your monthly budget and long-term financial goals.
FAQs
Yes, loan programs like the FHA 203(k) and Fannie Mae HomeStyle allow you to roll both the purchase price and renovation costs into a single mortgage. The loan amount is based on the home’s estimated value after renovations are complete, which gives you more borrowing power than a standard mortgage.
It depends on the loan type. The FHA 203(k) is limited to primary residences, but the Fannie Mae HomeStyle loan can be used on investment properties. Fix and flip loans and DSCR loans are also worth exploring, depending on whether you plan to sell or rent the property after renovating.
Yes, a cash-out refinance or HELOC on your primary residence can give you access to the funds you need. Just keep in mind that a cash-out refinance will replace your existing mortgage with a new one, which may not be ideal if you already have a low interest rate.
If you want to avoid another monthly payment, a home equity agreement (HEA) is a good option to consider. Rather than taking out a loan, you’ll receive a lump sum payment in exchange for a share of your home’s future value. There are no monthly payments or interest charges, and repayment happens when you sell, refinance, or reach the end of the agreement term.
