Buy and Repair Your Dream Home with a Purchase and Improvement Mortgage

young woman reading paper while painting

You’ve found the perfect house at a great price, but there’s one, big problem: it needs some renovations -- and you don’t have thousands of dollars in cash laying around to pay for it yourself. Well, don’t fret! There’s one kind of home loan, a purchase and improvement mortgage, that could be the perfect solution.

What Is a Purchase and Improvement Mortgage?

Purchase and improvement mortgages allow you to wrap both the cost of of the home itself and the cost of home improvements (up to a certain amount) into the same mortgage, giving you greater flexibility when it comes to finding and fixing up your dream home. Plus, these kinds of loans can also be used to renovate a home you currently own -- and they usually offer lower interest rates than alternatives like home equity lines of credit (HELOCs) and home equity loans.

 Types of Purchase and Improvement Mortgages

Right now, there are two popular types of purchase and improvement mortgages in the U.S.: the Federal Housing Administration 203(k) loan, and the Fannie Mae HomeStyle Renovation loan. We’ll cover both here.

Basics of the FHA 203(k) Loan

One of the most affordable and accessible ways to buy and renovate a home is through the FHA’s 203(k) loan program. You can also use the 203(k) loan to renovate a home you currently own. Like some other FHA loans, the 203(k) loan requires a minimum down payment of only 3.5 percent, which is fantastic if you’re not rolling in loads of cash but still want to make significant improvements to a home. And, much like other FHA loans, you’ll need a minimum credit score of 620 to be eligible. Compared to other kinds of loans, that isn’t really that high.

There are two major kinds of FHA 203(k) loans, limited and standard. The limited FHA 203(k) loan has a minimum renovation limit of $5,000 and a maximum renovation limit of $35,000 -- but doesn’t require much oversight. In contrast, the standard 203(k) loan can be utilized for much bigger renovations, but you’ll need a specialized 203(k) consultant to monitor each stage of the process. For both kinds of loans, funds are released from an escrow account as the renovations are completed. 

In addition to these specific renovation limits, FHA 203(k) loans need to fall into the specific FHA loan limits for the area of question, which vary from county to county. 

Basics of the Fannie Mae HomeStyle Improvement Loan

Another somewhat popular option for home purchase and improvement loans is the Fannie Mae HomeStyle Improvement loan. Much like the FHA 203(k) loan, you’ll need a minimum 620 credit score to apply. In addition, you’ll need a minimum 5% down payment, which is slightly more than the minimum 3.5% required for the FHA 203(k) loan. 

Before qualifying for a HomeStyle loan, you’ll also need a licensed contractor to create a detailed cost estimate, explaining the specific work that will be done to renovate the home. Just like a FHA 203(k) loan, funds for the loan are placed in an escrow account that is used to pay the contractor directly, so you may not have that much freedom or flexibility when it comes to making changes on the fly.

FHA 203(k) Loans vs. Fannie Mae HomeStyle Loans

FHA 203(k) Loans

  • Require minimum 3.5% down payment

  • Require a minimum 620 credit score

  • Need a FHA 203(k) loan specialist to supervise the entire process, for standard 203(k) loans (those above $35,000)

  • Loan funds are placed in an escrow account

  • Available in fixed or variable rate options

Fannie Mae HomeStyle Loans

  • Require minimum 5% down payment

  • Require a minimum 620 credit score

  • Requires a licensed contractor to do a cost estimate

  • Loans are placed in an escrow account

  • Available in fixed or variable rate options

If you'd like to learn more about the FHA 230(K) or Fannie Mae HomeStyle loan programs, fill out the form below for a risk-free consultation.

The Risks of Purchase and Improvement Mortgages

two people reading house plans on a tablet

Purchasing and remodeling a home can sound like a fantastic experience, but there are several pitfalls you should watch out for. First off, remodeling an older home can quickly become a lot more expensive than it seems. Things you can’t see, like insulation, drainage, and plumbing, may need to be replaced -- and those costs can seriously add up. If you’re not careful, what looked like a $30,000 renovation can easily spiral into a $60,000 venture. If you don’t have the mortgage funds to renovate, you may have to use your own funds or take out riskier, personal loans.

So, to avoid any surprises:

  • Have a licensed contractor inspect the property before purchasing it to create an estimate of the renovation costs

  • Consult with the contractor (and possibly other experts) to make sure you can get the proper permits for your planned renovations, otherwise, you could be fined -- and it could be more difficult for you to sell your home in the future

  • If possible and permitted by your lender, you can take out a slightly larger loan than you need to complete the project, to compensate for any unexpected expenses

Who’s an Ideal Borrower for a Purchase and Improvement Mortgage? 

While purchase and improvement mortgages can be a fantastic way to rehab a fixer-upper, or just put a few finishing touches on a home that’s nearly perfect, they aren’t right for everyone.

In particular, the ideal borrower for a purchase and improvement mortgage:

  • Is willing to pay a slightly higher interest rate in order to make renovations to an existing property

  • Is prepared to make a strict renovation budget and stick to it

  • Is conscious of the fact that some home renovations increase a home’s resale value (and can likewise increase home equity) and some do not

 Purchase and Improvement Mortgages for Second Homes and Investment Properties

Unlike some other kinds of specialized home loans, both FHA 203(k) loans and Fannie Mae HomeStyle loans can be used for second homes and investment properties, though it may be harder to get for these purposes.

For example, in addition to being used to renovate single-family homes, the FHA 203(k) loan can also be used to:

  • Renovate duplexes, triplexes and quadplexes

  • Renovate/convert a single family dwelling into a multifamily unit

  • Renovate/convert a multifamily unit into a single, double, or triple family unit (i.e making a triplex into a duplex)

  • Add a new foundation to an existing home

  • Tear down and rebuild a home (while retaining the original foundation)

Plus, those options don’t just have to be applied to a second or investment home. For example, you could use a FHA 203(k) to tear down and rebuild your primary residence, while retaining the original foundation, or to make your home a duplex, in order to rent out one part of it for an additional stream of monthly income.

Purchase and Improvement Mortgages: In Review

house keys held over a table with laptop and house plans

In the end, not every house on the market is perfect, and when you see a great opportunity to take an older house from good to great, you shouldn’t have to dip into your own funds just to do some renovations. A purchase and improvement mortgage often only requires a little bit of money down -- and, if you make smart renovations, you could add significant equity to your new home in just a few months. 

Despite that, you need to be careful. For every great home renovation, there’s a homeowner who’s been burned by a bad contractor, an overly ambitious plan, or an unrealistic budget. So, proceed with caution -- but, if you know what you’re doing, don’t be afraid to use a home purchase and improvement mortgage to create the home of your dreams

Purchase and Improvement Loan FAQ Knowledge Base