Why it matters

Renovation loans bundle construction funding with mortgage financing so borrowers can buy or refinance and fix a home in one transaction. Lenders underwrite both the borrower’s creditworthiness and the renovation plan itself. Getting these pieces right shortens underwriting and reduces the chance of holdbacks or rejected draws.

Key lender requirements

  • Credit score: Many conventional renovation products (including Fannie Mae HomeStyle) typically expect a minimum credit score near 620. Federal programs such as the FHA 203(k) may accept lower scores for purchase loans (often around 580 for the 3.5% down payment benchmark) — check HUD guidance for program specifics. (HUD: https://www.hud.gov/program_offices/housing/sfh/renovation)
  • Debt-to-income (DTI): Lenders commonly look for a DTI at or below about 43%, though some will allow higher DTI with compensating factors like strong reserves or a high credit score. (CFPB: https://www.consumerfinance.gov)
  • Income documentation: Two years of tax records, recent pay stubs, and proof of other income are standard. Self‑employed borrowers typically need profit-and-loss statements and recent tax returns.
  • Property eligibility: Not all properties qualify. Lenders check habitability, title, and whether the property type is allowed by the program (primary residence vs. second home, condo rules, etc.).
  • Scope of work and contractor bids: A signed contract, licensed contractor, and detailed line-item bids are usually required. Lenders want contractor licensing and insurance information before funding.
  • Appraisal based on after‑improved value (ARV): Many rehab loans use an appraisal that reflects the expected value after the completed renovations. The loan-to-value (LTV) is calculated on that ARV and varies by program.
  • Draw schedule & inspections: Funds for the renovation are typically released in draws tied to milestones and inspections. Expect lender-ordered inspections before each draw.
  • Contingency reserve: Lenders often hold a contingency reserve—commonly 10% to 20% of renovation costs—to cover unexpected repairs.

How the underwriting process treats the renovation portion

Underwriters will evaluate both the borrower (credit, income, assets) and the project (realistic budget, contractor qualifications, permits). They verify that:

  • The contractor bid matches the scope of work and is priced competitively.
  • Permits required for the work will be obtained and that work meets local codes.
  • Appraisal supports the ARV used to determine the maximum loan amount.

Programs differ: the FHA 203(k) and Fannie Mae HomeStyle Rehab are common options with different rules, allowable work, and documentation requirements — see program pages and lender overlays for details. For a program-specific walkthrough, read our guide on How to Qualify for an FHA 203(k) Renovation Loan.

Common documentation lenders request

  • Fully executed contractor agreement and itemized bids
  • Contractor licenses, proof of insurance, and lien waivers
  • Detailed renovation budget and contingency plan
  • Recent bank statements and retirement account statements (reserves)
  • Signed purchase contract (for purchase-rehab loans)

Practical tips to improve approval odds (from practice)

  • Pre‑qualify with a lender who regularly does renovation loans — underwriting experience matters and reduces surprises. In my 15 years helping clients, lenders comfortable with rehab loans close faster.
  • Use licensed, insured contractors and get multiple bids to demonstrate market pricing.
  • Build a 10–20% contingency into your budget and include it in the lender package.
  • Keep documentation organized: contractor license, proposal, timeline, permit plan, and certificates of insurance.
  • Compare alternatives: sometimes a HELOC or cash‑out refinance is cheaper for small projects. See our comparison: Using a HELOC vs a Renovation Loan for Major Home Upgrades.

Common mistakes to avoid

  • Submitting vague or incomplete scopes of work — lenders require line-item budgets.
  • Hiring unlicensed contractors — this can kill approval or delay draws.
  • Underestimating contingency needs — surprise repairs are common in older homes.
  • Assuming every program allows the same renovations — check program and local code restrictions.

Quick FAQ

  • Can I do DIY and still use a renovation loan? Many programs require work be performed by licensed contractors for the portion financed; minor DIY cosmetic items may be acceptable, but labor covered by the loan usually must be contracted and documented.
  • What if costs exceed the budget? A contingency reserve helps, but exceeding the approved budget may require an amendment, additional funding, or using personal savings/HELOC.

Bottom line

Qualifying for a renovation loan requires both solid borrower underwriting and a clear, well-documented renovation plan. Start early with a lender experienced in rehab products, gather detailed contractor bids, and build contingency into the budget to avoid delays.

Sources and further reading

Professional disclaimer

This article is educational and not personalized financial or legal advice. Program rules, rates, and lender overlays change; consult a qualified lender or financial advisor about your specific situation.