Overview of Renovation Loans

Renovation loans can present a streamlined financing method for borrowers purchasing a fixer-upper. Instead of taking one loan for the property and another for the improvements, the borrower can take a loan that has a sum large enough to purchase the property and improve it all in one step.

Home Equity Loan and Mortgage in One

This loan will be larger than the purchase price of the home, and the additional amount is similar to a home equity line of credit. The borrower has used the equity in the home, plus the estimated additional equity after improvements, to finance the improvements themselves. 

Process

To qualify for a renovation loan, the borrower typically will submit plans to improve the property at the time of the application. The lender uses these plans to estimate the added value to the property plus the cost of construction. The renovation loan will be high enough to cover the cost of construction, and the secured asset will be valued at the anticipated value after improvements are complete. A borrower must have excellent credit to qualify since this loan is very risky for the lender. The financing charges may be slightly higher on this type of loan to compensate for the risk level.