If you found a home you love, but know that it needs some renovating, you may wonder if you can add the renovation costs to your mortgage. Typically, purchase mortgages don’t allow you to pay for anything except the cost of the home and possibly some closing costs.

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There are a couple of loans that do allow this, though. Keep reading to see which loans may suit your needs.

Fannie Mae HomeStyle Loan

You may have heard of Fannie Mae before. This is the government entity behind conventional loans. While Fannie Mae offers basic purchase mortgages, they also offer a loan called the HomeStyle loan. This loan provides up to 95% financing which includes the cost of renovating the property. The actual cost of the renovations cannot exceed 75% of the ‘as improved value’ of the property. If you are a first-time homebuyer, though, you can borrow a total of 97% of the home’s value.

Fannie Mae has the following requirements for the HomeStyle loan:

• If the home is inhabitable, you can add the cost of the principal, interest, taxes, and insurance into your loan for up to six months
• You may not use the program for a teardown
• The renovations don’t have to add value to the home, but it will limit the amount you can borrow for the renovations if the home’s value doesn’t increase
• You can buy/renovate a 1-4 unit property
• You may need up to a 15% contingency fund to account for any unforeseen circumstances and costs
• Renovations must be completed within 12 months of the closing date
• You must choose your own contractor, but the lender must approve the contract to make sure he/she is qualified for the job
• You must have an executed contract with the contractor
• You may be able to do the work yourself if you can prove that you have the skills/time and the renovations don’t exceed 10% of the after completed value
• The lender can disburse up to 50% of the renovation funds at the closing
• The remaining funds are disbursed upon lender approval

If there are any funds left after paying all contractors, the funds will pay the principal balance of your loan down. You cannot receive any cash in hand.

FHA 203K Streamline Loan

If you don’t qualify for a Fannie Mae loan, the FHA 203K loan may be another option. This government-backed loan has the flexible guidelines of FHA loans with the ability to tack on the costs of renovating a home.

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The FHA has two 203K loans available – the streamline 203K and the full 203K. The streamline version allows renovations up to $35,000 or up to 110% of the after-improved value of the home (whichever is less). You can make minor repairs and cosmetic changes with this program. You cannot make any structural changes to the home. The streamline loan has the following requirements:

• Work must start within 30 days
• Work must be completed within 6 months
• The contractors must be licensed and insured and approved by the lender
• You may be able to do the repairs if you can prove that you have the skills and time
• You must put down at least 3.5% on the home
• You can use this program on 1-4 family units
• The lender can disburse up to 50% of the funds at the closing with the remainder funded after approval of the work completed

A few of the most common repairs made with the 203K streamline loan include:

• New roof
• New carpeting
• New appliances
• Installation or repair of a deck or patio
• New doors or windows
• Weatherproofing or waterproofing the home and/or basement
• You must occupy the home as your primary residence

FHA 203K Loan

FHA 203K loan doesn’t have the dollar amount restriction that the streamline loan has and it allows major renovations, including structural work.

You can borrow up to 110% of the after-improved value as determined by the appraiser. You will have to find a contractor, draw up a contract and then discuss the changes with an appraiser to see how much value it would add to the home.

The full 203K has the following requirements:

• Work must start within 30 days
• Work must be completed within 6 months
• The contractors must be licensed and insured/approved by the lender
• You don’t have to be able to live in the home and you can wrap up to 6 months of mortgage payments into your loan if needed
• You must put down at least 3.5% on the home
• You must occupy the home as your primary residence
• The lender will disburse the funds as agreed upon in the contract with the contractor

There are two main differences with the FHA 203K streamline and FHA 203K standard loan. The first is the type of repairs. Any type of structural work, additions, or knocking down walls will require you to use the full 203K. In addition, any work that totals more than $35,000 requires the full 203K loan.

The second difference is the need for a loan consultant. This professional works on your behalf and is your go-between with the lender and the contractors. The loan consultant can do as much or as little work as you want him/her to do. You are responsible for paying the loan consultant fees and the loan consultant provides the approval/go ahead on any work. He/she will oversee the entire project and make sure that the lenders and your best interests are protected. The loan consultant has the final say in funds disbursement.

Both renovation loans give you the chance to renovate a home before you even move into it. It’s a great way to have just one loan rather than multiple loans, while keeping your interest rate low and your closing costs down.

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