How to Make the Most of Your Home with a Renovation Loan

After you buy a home, a swimming pool install or kitchen remodel might be next on your agenda. 

We know the perfect loan to finance your renovation dreams without waiting until you finish saving up or having to use collateral. 

What's in this article?

What is a renovation loan?
How do renovation loans work?
Types of renovation loans
What is a CHOICERenovation loan and how is it different?
Difference between CHOICERenovation, FHA 203K, and Homestyle Renovation Mortgage 
CHOICERenovation loan requirements
Make the most of your home with Compass Mortgage

Read on to learn more about renovation loans and how they can help you get the most enjoyment out of your house. 

What is a renovation loan?

A renovation loan, also called a home improvement loan, is a type of loan  designated for home repairs and remodeling. 

You can use this loan to replace your old roof, add a basement to your home, install a swimming pool, add a fireplace and remodel your kitchen, just to name a few ideas. 

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How do renovation loans work?

Renovation loans can provide you more influence over the worth of your property by increasing the home’s value and allowing you to accumulate equity more quickly than you could by purchasing a home that’s ready to move into.

Some home renovation loans can be utilized to buy a fixer-upper and make renovations immediately without needing to qualify for separate financing, so you don’t necessarily have to be a homeowner already. 

Renovation loans give buyers the option to buy in more expensive neighborhoods. They can likely purchase an older home that’s been maintained at an affordable price or perhaps a distressed home in a recently-revived community. 

After all, properties that require renovation rarely go on the market at their fullest potential listing price. Living in a building zone can require patience and time, but it can result in a lower final purchase price. 

You’ll be satisfied when you can create a home that accurately reflects your preferences and way of life—whether that means adding a bathroom, removing some walls, installing water- and energy-saving fixtures or unique landscaping.

Types of renovation loans

There are several types of renovation loans including: 

  • Home equity loans or HELOCs (home equity lines of credit)
  • Mortgages with extra funds for renovation
  • Cash-out refinances 
  • Unsecured personal loans
  • Government programs

Fannie Mae HomeStyle Renovation loan

With the Fannie Mae HomeStyle Renovation program, borrowers can either purchase a property in need of repairs or refinance their current mortgage to receive funds for upgrades.

You won’t need one loan for the mortgage and a separate loan for house repairs such as with other types of loans, because a HomeStyle loan only requires one loan and one monthly payment. Obtaining one loan saves time and money at closing.

FHA 203(k) loan

The FHA 203(k) loan is a government loan that can be used to finance both the purchase of a property and improvements under a single mortgage loan, much like the Fannie Mae HomeStyle Renovation program. The FHA offers two different 203(k) loans:

  •  Limited 203(k) loans: The maximum amount for limited 203(k) loans is $35,000 and usually is for non-structural improvements.
  •  Standard 203k); This type of 203(k) loan is typically used for substantial construction or repair.


A home equity loan (HEL) is a lump-sum, fixed-rate loan with consistent monthly payments throughout the loan duration. 

A revolving balance and credit limit are features of a home equity line of credit (HELOC). This loan is helpful for homeowners with numerous payments on a sizable home repair project due over time, functioning something like a credit card.

The two are similar in that they provide access to the equity you’ve already built up in your home.They differ, however, in the way that each gives you access to that equity. Deciding on which one is right for you will depend on your equity, financial situation and your goals for the home renovation.

Cash-out refinance

Depending on how much equity you have, homeowners can refinance their mortgage to a higher amount than the previous mortgage and withdraw the difference in cash.

If you can refinance at a rate that is less than what you’re now paying for your mortgage, this could be the right choice for you. 

Personal loan

A refinance or home equity loan is not the same as a personal loan from a bank, credit union,or online lender. Credit rating, income and financial background all play a role in loan eligibility.

Unsurprisingly, individuals with “excellent” FICO credit scores of 740 and higher receive the best personal loan interest rates, which can be as low as 6% APR. Even though the interest rates on these loans are typically substantially higher, some lenders offer personal loans to borrowers with credit scores as low as 580. 

What is a CHOICERenovation loan and how is it different?

The Freddie Mac CHOICERenovation mortgage enables borrowers to purchase and renovate properties without requiring two separate loans.

With this loan, existing homeowners can also refinance the cost of renovations into the new loan amount.

Many borrowers want to buy an affordable house and renovate it; but sometimes, financing such projects requires two loans and two closings.

For the initial mortgage, there’s just one closing. But a cash-out refinance, second loan and a home equity line-of-credit (HELOC) require an additional closing. This means paying twice for title insurance, legal fees and other closing-related costs. 

Freddie Mac’s CHOICERenovation financing program eliminates the hassle and expense of closing on two loans.

For example, a CHOICERenovation mortgage can be the best option if you fall in love with an old colonial-style house that is reasonably priced but still has its old kitchen appliances or if you’re charmed by the thought of owning a log cabin but find one with a leaky roof. 

Difference between CHOICERenovation, FHA 203K, and Homestyle Renovation Mortgage 

Freddie Mac’s CHOICERenovation loan is similar to the FHA 203(k) loan and Fannie Mae’s HomeStyle Renovation mortgage since they all require a single-close process. 

However, one significant difference between these loans is that you can use the CHOICERenovation mortgage to finance future proof or resilience items, which isn’t allowed with the HomeStyle mortgage program. 

The FHA 203(k) has a credit score minimum requirement of 580 and a DTI requirement of 43%. With a CHOICERenovation loan, the credit score and DTI limits are set by the individual lenders. 

ChoiceRenovation also has no consultant requirement to guide the borrower through the construction process, but this is required with the FHA 203(K) loan. 

The FHA 203(k) rehab financing also requires a 3.5% down payment. 

CHOICERenovation loan requirements

You must satisfy Freddie Mac’s automated underwriting standards for conventional loans to be eligible. The following is a summary of the prerequisites you must fulfill.

Eligible Property Types

You can use a CHOICERenovation loan to buy these types of properties:

  • Condo unit
  • Co-op unit
  • Primary residence with one- to four-unit 
  • A second home with one unit
  • An investment home with one unit 
  • Manufactured home

Down payment

The purchase price plus the cost of renovations or the post-renovation valuation of the property are used to determine the minimum down payment needed for a purchase loan, whichever is lower. 

Let’s look at an example:

  • 95% loan-to-value ratio on a 1-unit primary residence: 5% down
  • 90% on a 1-unit second home (10% down)
  • 85% LTV ratio on a 2-unit primary residence (15% down)
  • 80% LTV ratio on 3-4 unit primary residence (20% down)
  • 85% LTV on investment properties (15% down)
  • 95% LTV ratio on Manufactured home (5% down)

Loan Limits

The loan limits depend on property type and the conventional loan limit. The maximum conventional loan amount for a single-family home is $510,400, and the cap for a 4-unit is $981,700. If you reside in a high-priced area, the limits will be modified appropriately. In more costly locations, the single-family cap is $765,600, while the four-unit ceiling is $1,472,550.

However, this doesn’t mean you can borrow the maximum amount permitted by your region and property type. 

Lenders won’t give you more money than the property is worth. Additionally, they won’t lend you more money than they believe you will be able to repay. 

Repairs and renovations cannot cost more than 75% of the property’s post-renovation worth if you are utilizing a CHOICERenovation loan to purchase a home.

Interest Rates

An interest rate premium is not required with CHOICERenovation loans. The interest rate you pay will be the same as any other mortgage you may get for a purchase or refinance. With a CHOICERenovation mortgage, the same variables that can raise your rate with any initial mortgage can also raise it. 

Credit Score and DTI

For CHOICERenovation mortgages, Freddie Mac has no unique credit score or debt-to-income criteria. This usually means that the borrowers must satisfy the lender’s standards for traditional mortgages. 

When putting down less than 25% on a single-family house, most lenders need a credit score of at least 620, and when purchasing a second home or investment property, they demand a credit score of at least 720.

The CHOICERenovation loan does not typically have any specified debt-to-income (DTI) limitations from Freddie Mac.

Make the most of your home with Compass Mortgage

Today is a good time as ever to apply for a home renovation loan. 

Contact Compass Mortgage today. We’ll finance your home with our simple, personalized loan process—and treat you like family.

We’re here to help with your questions and next steps. To speak with one of our experienced loan officers, give us a call at (877) 932-8221.