Overview

Buying a home with renovation financing lets you combine acquisition and repair costs into one loan so you can purchase a property that needs work and fund the improvements up front. Common products include FHA 203(k) and Fannie Mae HomeStyle loans, which underwrite based on the expected value after repairs, not just the current condition (HUD; Fannie Mae).

What lenders review — the checklist

  • Project scope and contractor bids: Lenders want a detailed work plan, fixed bids or itemized estimates, contractor license info, and written timelines. Unclear or informal quotes delay underwriting.
  • After‑repair value (ARV) and appraisal: Lenders typically order an appraisal that reflects the property’s value after the completed renovation. The ARV helps determine the loan amount and loan‑to‑value (LTV) limits.
  • Loan program rules and LTV: Different programs set different LTVs and maximum renovation allowances. For example, FHA 203(k) and HomeStyle have distinct requirements and eligible repairs — speak with a lender familiar with the product you need. See our guides on FHA 203(k) Loan and How to Qualify for an FHA 203(k) Renovation Loan.
  • Borrower creditworthiness: Credit score, employment history, and debt‑to‑income (DTI) ratios remain central. Renovation loans add documentation (contractor agreements, bids, cost breakdowns) but don’t generally relax borrower standards.
  • Reserves and contingency: Lenders expect contingency funds (commonly 10–20% of renovation cost) and may require reserves to cover cost overruns or construction delays.
  • Draw schedule and inspections: Funds for work are placed in escrow; lenders release draws after inspections and contractor invoices confirming completed phases. Timely inspections are critical to avoid payment delays.
  • Permits and code compliance: Major work must be permitted and meet local code. Lenders can require proof of permits and final inspections before issuing final disbursements.
  • Property type and occupancy: Some renovation products restrict investment properties or condos. Owner‑occupancy rules may apply depending on the program.

How the money flows

Most renovation loans hold the renovation portion in escrow. Instead of one lump sum to the borrower, the lender pays contractors as work is verified through inspections and invoices. This reduces fraud risk and protects both borrower and lender. Expect an initial disbursement at closing for immediate items and subsequent draws tied to milestones.

Practical tips from experience

  • Work with experienced lenders and mortgage brokers who handle renovation loans regularly — they’ll anticipate typical appraisal and draw questions.
  • Get contractor bids in writing and include itemized scopes that match what you’ll submit to the lender.
  • Build a realistic contingency (10–20%) into your budget; small surprises become big delays when draws are tied to inspections.
  • Prioritize mandatory repairs (roof, electrical, structural) in the draw schedule so the home is safe and insurable early in the project.
  • If unsure whether to use a renovation mortgage, compare to alternatives like a HELOC or home equity loan — each has different timelines, rates, and qualification rules. Read more: Renovation Loans vs Home Equity Loans: Which Is Right for Your Project.

Common mistakes borrowers make

  • Submitting vague scopes of work: Vague or incomplete plans lengthen underwriting. Provide drawings, line‑item budgets, and contractor credentials.
  • Underestimating timeline and costs: Renovation schedules slip, and when they do, additional inspections and approvals can increase costs and stress cash flow.
  • Choosing an inexperienced lender: Not every lender regularly underwrites renovation loans — pick one with documented experience to avoid surprises.

Quick borrower checklist before applying

  1. Written contractor bids and contractor license/insurance details.
  2. Detailed scope of work and timeline, including necessary permits.
  3. A 10–20% contingency fund in savings or escrow.
  4. Clear borrower documentation: pay stubs, tax returns, and explanations for large deposits.
  5. Lender‑recommended appraiser familiar with ARV estimates.

Frequently asked questions

  • Which repairs are eligible? Major structural, systems (electrical, plumbing, HVAC), and cosmetic repairs may be eligible, but program rules vary. Cosmetic-only projects sometimes face stricter limits.
  • How long does the draw process take? Each draw typically requires an inspection request and 7–14 days for review and payment, depending on the lender and inspector availability.
  • Can I use a renovation loan to flip a house? Most renovation mortgage programs are designed for owner‑occupants and have restrictions for flips; short‑term rehab or investor loans are more appropriate for flips.

Related resources

Author note and disclaimer

In my practice I’ve seen renovation loans allow buyers to purchase homes they otherwise couldn’t safely occupy — but success depends on planning, realistic budgets, and a lender who understands draw management. This article is educational and not individualized financial advice. Always consult a mortgage professional or financial advisor about your situation.

Authoritative sources

Last reviewed: 2025.