Can You Finance Home Renovations Into Your Mortgage When You Buy a House?

Most buyers search for essentially the same house. They want the remodeled kitchen, updated bathrooms, newer flooring, fresh paint, good landscaping and a property they can move into without immediately spending another six months dealing with contractors.

There is absolutely nothing wrong with wanting turnkey. The problem is that everybody else wants it too.

A beautifully renovated property can attract more buyers and command a premium because someone else already dealt with the inconvenience, uncertainty and expense of improving it. Meanwhile, another property a few blocks away may have an outdated kitchen, terrible flooring and bathrooms that haven't seen daylight since 1987.

Most buyers swipe right past it.

That can create an opportunity.

Depending on the property, improvements and borrower qualifications, a renovation mortgage may allow a buyer to finance the purchase of a home along with eligible renovation costs. Instead of needing enough cash to purchase the property and then separately fund all of the improvements, financing may potentially combine those pieces into a single transaction.

What Is a Renovation Mortgage?

A renovation mortgage is designed to finance both the acquisition or refinance of a property and eligible improvements to that property. The specific structure depends on the program being used, and renovation financing isn't simply a traditional mortgage with extra cash handed to the borrower at closing.

Typically, the renovation scope, contractor information, bids and other documentation need to be reviewed as part of the transaction. Renovation funds are generally controlled and released according to the applicable program and construction process rather than simply deposited into the borrower's checking account.

That additional structure means a renovation loan can require more planning than buying a finished home with traditional financing. The tradeoff is that it can potentially allow a buyer to solve both the purchase problem and renovation problem at the same time.

Why Would You Finance the Renovation?

Imagine two homes in the same neighborhood.

The first property has already been beautifully renovated and is listed for $1.2 million. The second is similar in size and location but needs significant cosmetic work and is listed for $1 million.

The easy reaction is to prefer the $1.2 million property because everything is already finished.

But that's not the entire analysis.

What would it actually cost to renovate the $1 million property? What improvements would you make? What would the finished property potentially be worth? How much cash would you otherwise need to complete the work? Most importantly, how does the total financing and monthly payment compare with simply purchasing the already-renovated house?

Those are the numbers I want to see before dismissing the fixer-upper.

FHA 203(k) Renovation Financing

One of the better-known renovation programs is the FHA 203(k) mortgage. It can allow qualified borrowers to finance the purchase or refinance of an eligible property along with qualifying rehabilitation expenses under FHA requirements.

There are different 203(k) structures depending on the scope of work. The program can be useful for buyers who want FHA financing but are considering properties that need improvements.

The property, borrower, contractor, renovation scope and transaction all have to satisfy the applicable FHA requirements. This isn't simply a workaround for buying any destroyed property imaginable.

But it can significantly expand the inventory a buyer is willing to consider.

Conventional Renovation Financing

FHA isn't the only renovation option. Conventional renovation programs can also allow eligible borrowers and properties to finance qualifying improvements.

These may be particularly useful when FHA isn't the preferred structure or when the borrower's profile and proposed renovation fit conventional guidelines better.

The correct program depends on the property type, occupancy, loan amount, improvement scope, credit profile, down payment and other factors.

That's why I don't like starting the conversation with:

“I need a 203(k).”

Start with:

“Here's the house. Here's what I want to do to it.”

Then determine the financing.

The After-Improved Value Can Matter

This is one of the most interesting concepts in renovation lending.

Traditional purchase financing is largely focused on the property you're buying in its current condition. Renovation financing can potentially incorporate the planned improvements into the valuation process according to the program's requirements.

An appraiser may evaluate the property based on the approved renovation plans and determine an applicable after-improved value.

That can make a significant difference when a buyer is purchasing a property specifically because it needs work.

Instead of pretending the outdated kitchen and damaged flooring are staying forever, the financing can potentially account for the approved improvements that are actually going to be completed.

Renovation Financing Isn't Just for Cosmetic Work

People hear “renovation loan” and immediately picture quartz countertops and a giant kitchen island.

Those certainly may be part of a project when permitted, but renovation financing can potentially address much broader improvements depending on the program.

A property may need roofing, electrical work, plumbing, HVAC, flooring, bathrooms, kitchen improvements or other rehabilitation. Some borrowers may want to reconfigure spaces or make larger improvements subject to program requirements.

This is why renovation financing can sometimes rescue a transaction involving a property that traditional financing struggles with because of its current condition.

What About Adding Square Footage?

This is where your renovation plan can become much more ambitious.

Suppose you're looking at a smaller home in an area you love, but you need another bedroom, larger kitchen or additional living space. Depending on the program, project and property, certain renovation financing may potentially accommodate substantial improvements or additions.

That means buyers shouldn't always search exclusively for the house that already has exactly the square footage they want.

Sometimes it makes sense to ask whether the location is right and the house can become right.

You can't renovate the neighborhood.

You can renovate the house.

This Is Especially Relevant in Expensive Markets

In markets like California, buyers frequently make compromises between location, condition and price.

Maybe the completely remodeled house in the neighborhood you want is outside your comfortable range. The outdated property around the corner might be much more attainable.

Renovation financing doesn't magically make construction inexpensive, but it gives us another way to compare the options.

Instead of saying:

“I can't afford the remodeled house.”

The better question may be:

“Can I afford the outdated house plus the renovation?”

Those are very different questions.

Why Contractors Need to Be Involved Early

Renovation financing requires more coordination than a standard purchase.

If you're considering a property that needs significant work, we want realistic bids and an appropriate scope before everyone starts making assumptions about what the project will cost.

A kitchen remodel isn't automatically $50,000.

An addition isn't automatically $200,000.

Construction costs vary dramatically based on location, materials, labor and scope.

The mortgage strategy is only as useful as the renovation budget behind it.

What About Buying the House and Using a HELOC Later?

That's another strategy worth comparing.

If the property qualifies for traditional financing in its existing condition and the borrower has sufficient cash or future equity access, purchasing normally and financing improvements separately could make sense.

A HELOC, home equity loan, cash reserves or other financing could potentially fund later improvements.

But there are obvious questions.

Will enough equity exist after closing? Will the borrower qualify for the additional financing? What will the rate be? How much liquidity remains?

Don't assume you can simply “get a HELOC afterward.”

Run that scenario before purchasing.

Renovation Loan vs. Turnkey House

This is the comparison I want buyers to make.

Suppose the turnkey house costs $1.2 million.

The fixer costs $1 million.

Now estimate the renovation.

Maybe it's $125,000. Maybe it's $200,000. Maybe once the contractor actually walks the property, it's $350,000 and the entire idea falls apart.

Great.

That's useful information.

The goal isn't convincing everyone to buy a fixer-upper.

The goal is determining whether buyers are unnecessarily eliminating properties because they don't understand the financing available to improve them.

The Biggest Advantage May Be Competition

There's another potential benefit that has nothing to do with the mortgage itself.

The ugly house may simply have fewer interested buyers.

Turnkey properties photograph beautifully. They get shared. Buyers walk in and immediately imagine themselves living there.

A property with an avocado-green bathroom and half-dead landscaping requires imagination.

That can shrink the buyer pool.

In the right transaction, being willing to solve a problem other buyers don't want to solve can create negotiating leverage.

Frequently Asked Questions

Can renovation costs be included in my mortgage?

Potentially. Certain renovation mortgage programs allow eligible purchase and improvement costs to be financed together, subject to program requirements.

Do I receive the renovation money at closing?

Generally, renovation funds are controlled and disbursed according to the applicable loan and construction process rather than simply being handed directly to the borrower.

Can I use a renovation loan for a kitchen remodel?

Potentially, yes, if the improvements and transaction satisfy the program requirements.

Can I add square footage?

Certain renovation programs may permit eligible additions or substantial improvements, subject to plans, valuation, contractor and program requirements.

Can I renovate an investment property?

Potentially under certain financing programs, but occupancy and property eligibility vary substantially. The specific transaction needs to be reviewed.

Is renovation financing harder than a normal mortgage?

It generally requires additional documentation and coordination because both the borrower and renovation project need to be evaluated. That doesn't mean it's inherently a bad option; it simply needs to be structured properly from the beginning.

The Bottom Line

Everybody wants the pretty house.

That's exactly why I want buyers to at least look at the ugly one.

You may discover that the fixer-upper isn't financially attractive once you price the improvements. If so, fantastic—buy the finished house.

But you may discover something completely different.

The less attractive property may have a lower purchase price, less buyer competition and the ability to become exactly what you want through renovation financing.

Don't buy a bad house simply because it's cheaper.

But don't eliminate a potentially great house simply because somebody else hasn't remodeled it yet.

Sometimes the opportunity isn't finding the perfect house.

It's finding the right house and making it perfect.