Conventional Rehab Loans: What You Need to Know

Written by Banks Editorial Team
4 min. read
Written by Banks Editorial Team
4 min. read

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Have you scoped out the housing market and determined a fixer-upper is the most affordable option? 

There’s a possibility you’re concerned about the cost of home repairs and upgrades. And despite having a sufficient amount in your savings account, you’d prefer a loan product to help cover the expenses. 

Fortunately, there are conventional rehab loan products to lend a helping hand. There’s also a viable alternative that lets you unlock even more borrowing power to fund your home improvements. 

Home Renovation Loans

Learn how the RenoFi ReFi cash-out refinance home renovation loan allows you access up to 80% of your home’s projected value after renovation.

What is a Conventional Rehab Loan?

A conventional rehab loan allows you to finance the purchase of a new home and the cost of renovations with a single mortgage product. This means you won’t have to take out a second mortgage or pay out of pocket for costly home improvement projects. 

Funds are provided through private lenders and banks and can be used to pay for cosmetic and structural upgrades. 

How Does a Conventional Rehab Loan Work?

Here’s what to expect with a conventional rehab loan: 

  • Step 1: Apply for a loan product. The lender will notify you of the loan terms, including the required down payment, if you’re pre-approved. 
  • Step 2: Retrieve contractor plans for the renovation project and submit them to the lender for approval. 
  • Step 3: If the plans are approved, the lender sends an appraiser to assign an after-repair value (that considers the contractor’s plans).
  • Step 4: Close on the home and commence renovations. They should be completed within six months, but some lenders permit the contract to spend up to a year on approved projects.

Types of Conventional Rehab Loans

Homebuyers can choose from two types of conventional rehab loans. 

Fannie Mae HomeStyle Renovation Loan 

The Fannie Mae HomeStyle Renovation Loan can be used to cover upgrade costs on a home you own or plan to buy. It is limited to 95 percent of the homes’ after renovation value. The loan comes with an adjustable or fixed interest rate that’s typically lower than what you’ll get with a home equity loan or line of credit. And you’ll get a 15- or 30-year loan term. 

Instead of taking out two separate loans, you’ll roll the purchase price and renovation costs into a single mortgage product. That means you’ll only pay closing costs once, and you’ll have a single monthly housing payment. However, you’ll have to refinance your existing mortgage if you already own the home, which means you could end up with a higher interest rate. 

Loans are capped at $548,250 in most markets for single-family properties. However, you could borrow as much as $822,375 if the property is in a more pricey market. It increases to $685,400 for four-unit properties and caps at $1.5 million in high-priced real estate markets. (Quick note: upgrades on manufactured homes are limited to $50,000 or 50 percent of the anticipated property value after renovations are complete). 

It can be used to complete most home upgrades and temporary living expenses during construction within six to 12 months of the closing date. However, borrowers are prohibited from building a second property, making temporary improvements or demolishing the property with the loan proceeds. 

You’ll need a 620 credit score to qualify. And ideally, your debt-to-income ratio should be no more than 45 percent. 

Freddie Mac CHOICERenovation

The Freddie Mac CHOICERenovation loan covers renovation costs on investment properties, second homes and multi-unit properties. It allows you to borrow up to 95 percent of the home’s after renovation value. 

You can use the loan proceeds on a property you plan to purchase or that you already own. But if it’s the latter, you’ll need to refinance your existing mortgage, and you could get a higher interest rate than you currently have. 

The upside is this loan product is more flexible than the Fannie Mae HomeStyle Renovation Loan. You can use the funds to make most upgrades, and you can cover the costs of renovations that will shield the property from sustaining severe damages if a natural disaster strikes. The cost of repairs for damages caused by natural disasters is also covered. 

Loan terms of 15 or 30 years are available. You’ll need at least 3.5 percent down, a credit score of 660, and your debt-to-income ratio should not exceed 43 percent. Are you planning to complete the renovations on your own? You could be eligible for a down payment credit if you finish the job before closing. 

Home Renovation Loans

Learn how the RenoFi ReFi cash-out refinance home renovation loan allows you access up to 80% of your home’s projected value after renovation.

When Should You Use a Conventional Rehab Loan?

A conventional rehab loan is ideal for homebuyers looking to purchase a fixer-upper but doesn’t have the funds to pay for upgrades. And even if you do have the cash on hand, you can avoid emptying out your savings account. Plus, you’ll get a single loan payment since you can roll the home purchase and renovation costs into one loan product with a competitive interest rate. 

How Do You Qualify for a Conventional Rehab Loan?

You could qualify for a conventional rehab loan if you meet the criteria below: 

  • Have good or excellent credit 
  • Have a down payment of at least five percent
  • Have an acceptable debt-to-income ratio

Quick note: Some lenders require up to 20 percent down. Even if you qualify for a lower down payment, any amount below 20 percent typically requires private mortgage insurance. Also, know that bad credit doesn’t necessarily disqualify you for a loan, but you’ll need an excellent explanation to convince the lender you’re a good candidate for funding. 

Alternatives to Conventional Rehab Loans

Are you looking to purchase a fixer-upper or refinance your existing loan and roll the renovation costs into the mortgage? A conventional rehab loan could be a good fit. But suppose you already have a low interest rate on your mortgage and prefer a home renovation loan instead. In that case, RenoFi could be the better option. 

If you haven’t heard of RenoFi, it’s an online lending platform that connects current and prospective homeowners with credit unions who can fund their renovation projects.

Loan amounts range from $20,000 to $500,000, and you could borrow up to 90 percent of the homes’ after renovation value. Here are the available loan options: 

  • RenoFi Home Equity: It’s a line of credit or traditional home equity loan that comes with a 10 year draw period and 20 year repayment period. Loans amounts are between $25,000 and $500,000, and both fixed and variable interest rates are available. 
  • RenoFi ReFi: It’s a fixed-rate mortgage product of up to $2,000,000. You could qualify for a repayment period of up to 30 years, but this loan is only available in certain states. 

What really makes RenoFi Loans stand out from the competition is their seamless process. There are no inspections or draws, and contractors can get paid without all the hassle that comes with traditional construction loans. Plus, you can get up to 30 years to pay your loan in full. 

Interested in learning how much borrowing power you can unlock with RenoFi? Use the loan calculator to see how much you could be eligible for, along with projected monthly payments and interest rates.


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All data provided by the Home Mortgage Disclosure Act, at updated Dec, 19
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