What Is a Renovation Loan? How to Finance a Home and Its Remodel Together

Q: Which renovation loan is best: FHA 203(k) or HomeStyle?

FHA 203(k) suits borrowers with lower credit scores or higher debt-to-income ratios, since FHA underwriting is more forgiving. HomeStyle suits stronger-credit borrowers because its mortgage insurance cancels at 20% equity and its project scope is broader, including luxury items and investment properties. Compare total cost over the years you expect to hold the loan, not just the rate.

Q: How long do I have to finish the renovation?

Most renovation loan programs require work to be substantially complete within 6 to 12 months of closing, with the exact deadline set by the program and your lender. Extensions are possible but not automatic. Because draws are tied to inspections, delays from permitting or contractor scheduling can push the timeline, so build slack into the contract from the start.

Q: Can I live in the house during the renovation?

Often yes for cosmetic and moderate work, but not always. Some renovation loans allow up to six months of mortgage payments to be financed into the loan precisely because the home is uninhabitable during construction. If the work involves gutting kitchens, baths or major systems, plan for temporary housing and ask whether payment reserves can be included.

Q: Do I have to use an approved contractor?

Yes in nearly all cases. Lenders require a licensed, insured contractor who submits a detailed bid and scope of work before closing, and who gets paid through inspected draws afterward. Limited do-it-yourself work is sometimes permitted on owner-occupied single-unit homes, but it typically covers materials only and still requires lender sign-off on the plan.

Written by Samantha SheltonNMLS 1647301Updated October 2026

Homeowner finishing drywall in a Michigan bungalow remodel paid for with a renovation loan

A renovation loan finances the purchase or refinance of a home and the cost of improving it in a single mortgage, underwritten against the home’s after-renovation value instead of its condition today. That one change in what the appraiser measures is where the borrowing power comes from: an FHA Limited 203(k) finances up to $75,000 of non-structural work, and Fannie Mae’s HomeStyle Renovation funds renovation costs up to 75% of the home’s “as completed” appraised value.

The renovation money never reaches you as cash. It goes into escrow and releases to your contractor in staged draws as inspections confirm completed work. Learn how the after-improved appraisal and draw schedule work, which program fits which project, and what commonly goes wrong. If you’re still mapping options, start with our Loan Types & Programs guide.

Key takeaways:

The loan is sized on the finished house: Underwriting runs against the “as completed” value, so a home that won’t appraise for price plus repairs today can still support the financing. On a purchase, HomeStyle caps the renovation portion at 75% of that after-improved value or of the price plus renovation costs, whichever is lower.
One loan, one closing, one payment: The FHA Limited 203(k) finances up to $75,000 of non-structural work and the Standard 203(k) has no separate renovation cap, replacing the usual mortgage-then-second-loan sequence.
The money releases in draws, against a clock: Funds pay out on inspection, and the work has a deadline: nine months on a Limited 203(k), 12 on a Standard 203(k), and 15 from closing on a HomeStyle.

What is a renovation loan?

A renovation loan is a mortgage that finances a property’s acquisition or refinance together with the cost of rehabilitating it, closed before any work begins and sized on the after-improved appraised value. It is one loan, one set of closing costs, and one monthly payment covering both the house and the work done to it.

Compare that to the ordinary path: you buy with a standard mortgage, then pay for the kitchen with savings or a home equity line of credit, which the CFPB describes as a credit line borrowed against your home’s equity that usually carries an adjustable rate.

Renovation lending sits inside the broader Specialty Financing family, alongside bridge loans, which cover the gap between buying your next home and selling your current one, and physician mortgage loans. One distinction matters: 203(k), HomeStyle and CHOICERenovation are agency programs with published rulebooks, while physician loans are lender and investor products whose terms vary by provider rather than by any agency guideline.

How does a renovation loan work?

Everything follows from the appraisal. Instead of valuing the house as it stands, the appraiser reviews your contractor’s scope of work and cost estimate and issues an opinion of value “as completed.” Your loan is sized against that number, not the peeling-paint version you toured.

That is why a $60,000 renovation budget can exist on a house that would never support a $60,000 second mortgage today, and why the scope must be settled before closing: the appraiser can only value work that has been specified and priced. From there, the process runs in five steps.

1. Pre-qualify and set the envelope: Purchase price plus renovation is one combined figure competing for a single ceiling, not two budgets.
2. Get contractor bids and a written scope: A licensed, insured contractor submits an itemized bid. On a Standard 203(k) an FHA-approved Consultant prepares the work write-up and cost estimate; on a Limited 203(k) a Consultant is optional and the fee can be financed.
3. Order the as-completed appraisal: The appraiser values the property against the approved scope. Our walkthrough of the home appraisal process covers how that valuation works.
4. Close, and fund the escrow: You close on the full loan before a wall comes down, and the renovation portion goes into a rehabilitation escrow.
5. Draw against completed work: Draw counts are limited: a Limited 203(k) allows four requests per contractor, a ceiling HUD raised from two in June 2026, and a Standard 203(k) allows five, four intermediate and one final.

Types of renovation loans compared

Four routes cover nearly every remodel. Only the first two underwrite to after-improved value.

Feature	FHA 203(k)	HomeStyle Renovation	Cash-out refinance	HELOC
Loan sized on	After-improved value	“As completed” appraised value	Today’s value	Today’s value
Cap on renovation money	$75,000 (Limited); no separate cap (Standard)	75% of the lesser of purchase price plus renovation costs, or the as-completed value	An 80% maximum LTV on a one-unit primary home	Lender-set against available equity
Credit and down payment	96.5% financing at a 580 minimum decision credit score; 90% at 500 to 579	As little as 3% down where the loan meets a 97% LTV option	You need existing equity	You need existing equity
Project scope	Non-structural only on Limited; structural work, additions and ADUs on Standard	No restrictions on type, no minimum amount, but no complete tear-down	Unrestricted; it’s your cash	Unrestricted; it’s your credit line
Mortgage insurance	1.75% upfront plus a 0.55% annual premium running the full term at 3.5% down	Private MI above 80% LTV, cancelable as equity builds	None at 80% LTV or below	None
Escrow and inspected draws	Yes	Yes	No	No, you draw at will
Deadline to finish the work	Nine months (Limited); 12 months (Standard)	15 months from closing, extendable to 18	None	None
Best fit	Thin cash, credit in the 500s to low 600s, an owner-occupied home	Strong credit, a bigger scope, a rental or second home	An owner with equity and no need for draw oversight	Phased work, if you accept a variable rate

FHA 203(k), Standard and Limited

The 203(k) splits on structural work, not budget size. The Limited version handles kitchens, baths, flooring, roofing, siding, windows, mechanicals and accessibility work up to $75,000 with no minimum repair amount, a ceiling HUD raised from $35,000 for case numbers assigned on or after November 4, 2024. The Standard version handles foundations, additions and accessory dwelling units, and requires at least $5,000 of eligible improvements plus a 203(k) Consultant. Our breakdowns of the benefits of FHA 203(k) loans and the pros and cons of FHA 203(k) loans compare them line by line, and HUD’s FHA loan programs page is the agency’s starting point.¹

Conventional renovation loans

Fannie Mae’s HomeStyle Renovation is the conventional workhorse and far less prescriptive: no required improvements, no restrictions on renovation type, and no minimum dollar amount, so long as the improvements are permanently affixed. Pools, garages and accessory units qualify; a complete tear-down does not. Read the mechanics in our guide to the HomeStyle Renovation loan and in Fannie Mae’s HomeStyle Renovation program details. Freddie Mac’s CHOICERenovation is the near-equivalent, applying the same 75% ceiling with work completed within 365 days of the note date.

What a renovation loan is not

Three products get confused with renovation loans and follow different rules. HomeStyle Refresh is Fannie Mae’s small-job option, capped at 15% of the as-completed value and finished within 180 days of the note date, better suited to an energy-efficiency upgrade than a remodel. A construction-to-permanent loan builds from the ground up; on a single-closing transaction Fannie Mae permits no single construction period longer than 12 months and no total beyond 18, with no exceptions granted. A cash-out refinance converts existing equity to cash with no escrow and no inspections, under its own seasoning rules: one borrower on title six months, any first mortgage paid off at least 12 months old.

What are the benefits of a renovation loan?

Each advantage has a rule behind it, not a slogan.

Borrowing power the house hasn’t earned yet: A home priced at $200,000 that will appraise at $300,000 finished can carry renovation money no equity-based product would approve today.
One closing, and mortgage terms on the whole balance: Purchase and renovation are underwritten together and closed once, so you pay one set of closing costs, and the renovation balance amortizes over the full mortgage term instead of carrying the adjustable rate a HELOC usually does.
Low down payments stay available: A 203(k) reaches 96.5% financing at a 580 minimum decision credit score, and HomeStyle can go as low as 3% down where the loan qualifies for a 97% LTV option. On a Fannie Mae standard purchase that tier requires at least one first-time home buyer; HomeReady carries no such requirement.
The interest follows ordinary mortgage rules: The IRS defines home acquisition debt to include a mortgage taken out to buy, build, or substantially improve a qualified home, with interest generally deductible for itemizers on up to $750,000 ($375,000 married filing separately) for debt incurred after December 15, 2017. A renovation mortgage meets that improvement test on its face, but deductibility depends on your return.²

Here’s the shape of a typical file. Say you’re buying a $200,000 bungalow that needs $60,000 of non-structural work and will appraise at $300,000 as completed. Because $60,000 sits under the Limited 203(k)’s $75,000 ceiling, the lighter version works. Your combined figure is $260,000, well under Michigan’s 2026 one-unit FHA limit of $541,287, and at 96.5% financing your minimum required investment is $9,100.³

What can go wrong with a renovation loan?

Renovation lending fails in predictable ways, and most are scheduling problems wearing a financial costume.

The scope is locked before you close: Bids, costs and drawings are baked in up front. Changing your mind about the kitchen in month two means a change order, a re-inspection and possibly re-underwriting.
Draw timing runs behind contractor cash flow: Payment follows inspection, not invoice. Contractors new to 203(k) and HomeStyle files underprice that lag, then slow down when it bites. Ask how many renovation draws they’ve submitted.
Overruns are not automatically covered: The loan funds the approved scope, so discoveries behind the drywall come out of a contingency reserve or your pocket. On a Standard 203(k) that reserve runs 10% to 20% of financeable repair costs on a structure 30 years or older, rising to a 15% minimum where utilities aren’t operable.
Permitting sets your real start date: Permits must be pulled before work begins, and older homes often trigger code upgrades once the permit is open. Read what home renovation permits you need before a contractor quotes you.
Sweat equity rarely pays: Both programs reimburse materials, not your own labor, and HomeStyle caps do-it-yourself work at 10% of the as-completed value on one-unit properties. If self-performed work is central to your budget, DIY renovation projects funded outside the loan may be cleaner.

These files also close slower, because bids, credential reviews, the as-completed appraisal and, on Standard files, a Consultant assignment all come first. Tell the seller before they accept your offer. And if the work is cosmetic and you have the cash, a plain mortgage plus savings skips the draw-and-inspection apparatus entirely, a call our comparison of financing home renovations walks through. Price the job against typical remodeling project costs, then hold a reserve for unexpected repairs.

What Michigan buyers should know

Michigan’s housing stock is old, which is precisely why renovation lending works here: the homes are affordable relative to the FHA ceiling, and they need work.

Pre-1978 homes trigger federal lead rules: The EPA’s Renovation, Repair and Painting Rule requires an EPA-certified firm for paid work disturbing more than six square feet of painted surface per room inside, or more than 20 square feet outside, in any home built before 1978. Approximately three-quarters of US homes that old still contain some lead-based paint, so on a Detroit or Flint bungalow that’s the default assumption. Confirm certification before the bid; it changes the price.
Permits run through your local enforcing agency: Michigan’s construction codes come from LARA’s Bureau of Construction Codes under the Stille-DeRossett-Hale Single State Construction Code Act, 1972 PA 230, with fees paid to your jurisdiction’s enforcing agency before a permit may be issued. Many communities enforce locally; where they don’t, the state does.
Aging systems push files toward the Standard 203(k): A structure 30 years or older carries a mandatory 10% to 20% contingency reserve on a Standard 203(k), and most candidate homes in Detroit, Flint, Grand Rapids and the older ring suburbs clear 30 years easily. Winter compounds it: a nine-month Limited 203(k) clock starting in October loses its exterior months, so sequence roofing and concrete first on a fall closing.
MSHDA assistance carries a higher credit bar: The MI Home Loan requires a minimum 640 credit score, and the MI 10K DPA provides up to $10,000 as an interest-free loan toward down payment, closing costs and prepaid expenses. FHA alone reaches 580. Whether a lender will pair MSHDA assistance with a renovation loan is a lender-level decision, so ask early.

How do you choose a lender for a renovation loan?

A renovation loan has more moving parts than a purchase loan: a contractor, a scope of work, an as-completed appraisal and draws after closing. A lender who does few of these will learn on your file. Ask these questions before you pick one.

Ask the lender	Why it matters
Do you offer both HomeStyle and FHA 203(k)?	The right program depends on your credit, your property and your project. A lender with only one can only offer you that one.
How do you approve a contractor, and how long does it take?	Most lenders want a license, insurance, references and an itemized bid. A slow approval delays the appraisal and the closing.
Who manages the draws, and how fast do funds release after an inspection?	Contractors get paid on inspection, not invoice. Slow draws are a common reason work stalls.
How is the contingency reserve set, and what happens to money left in it?	The reserve covers surprises behind the walls. Ask whether leftover funds go to extra work or to your loan balance.
What happens if the work runs past the deadline?	Ask about extensions, who pays for extra inspections, and what happens to your rate lock.
Will you need a 203(k) Consultant on this project?	A Standard 203(k) requires one. Their fee and schedule belong in your budget from the start.

Checking a Michigan contractor

Michigan licenses residential builders and maintenance and alteration contractors through LARA, the Department of Licensing and Regulatory Affairs. Check your contractor’s license on LARA’s lookup before the bid goes to the lender. On a pre-1978 home, also confirm the firm is certified under the EPA’s lead paint rule, since that can change the bid.

Align places both HomeStyle and FHA 203(k) renovation loans, so the program is chosen for your project, not for whichever one a single lender happens to offer. The stretch before closing is where renovation files stall: bids, contractor approval and the as-completed appraisal. Samantha works through those pieces with you and your contractor before the purchase agreement deadlines arrive. Review renovation financing.

How Align handles specialty financing

Specialty loans are where a single bank's menu runs out. Align places HomeStyle and FHA 203(k) renovation loans, non-warrantable condo loans, DSCR loans and standalone HELOCs through multiple wholesale lenders.

Samantha handles these files herself, from the first conversation to the closing table, with a processor supporting her behind the scenes. Complicated and impossible are not the same thing.

FAQ: Renovation loans

Here are answers to common questions about renovation loans.

Which renovation loan is best: FHA 203(k) or HomeStyle?

It depends on your credit and your property. The 203(k) suits lower scores and thinner cash, reaching 96.5% financing at a 580 minimum decision credit score, but its annual mortgage insurance premium runs the full term at that down payment. HomeStyle suits stronger credit: its private mortgage insurance cancels as equity builds, and its scope covers second homes and one-unit rentals FHA won’t insure. See how government-backed loans differ from conventional ones.

How long do I have to finish the renovation?

It varies by program, and the deadlines are firm. A Limited 203(k) allows nine months, a Standard 203(k) 12. HomeStyle requires completion no later than 15 months from closing, extendable to 18 only where the lender documents the delay, and CHOICERenovation runs 365 days from the note date. Permitting eats the calendar faster than labor does, so build slack into your fixer-upper timeline.

Can I live in the house during the renovation?

Often yes for cosmetic and moderate work, but the program may decide for you. A Limited 203(k) is ineligible if repairs keep you out more than a total of 30 days, which pushes gut renovations into the Standard version regardless of budget. A Standard 203(k) can finance up to 12 months of mortgage payments covering that period, but the reserve is financed inside the loan, so it competes for your county’s FHA loan limit.

Do I have to use an approved contractor?

Yes, in nearly all cases. Lenders require a licensed, insured contractor who submits an itemized bid and written scope before closing and is paid through inspected draws afterward. Limited self-performed work is sometimes permitted on owner-occupied one-unit homes, but reimbursement covers materials only, never your labor. Distressed and foreclosed homes add their own wrinkles, covered in buying distressed properties.

The bottom line on renovation loans

A renovation loan finances a home and its remodel in one mortgage, underwritten to the after-improved appraised value rather than the property’s current condition, with the money held in escrow and released to contractors in inspected draws. The FHA Limited 203(k) covers up to $75,000 of non-structural work in nine months; the Standard version has no separate renovation cap and allows 12. Fannie Mae’s HomeStyle caps renovation funds at 75% of the lesser of the purchase price plus renovation costs or the as-completed value on a purchase, 75% of the as-completed value on a refinance, and allows 15 months from closing, on second homes and rentals as well as primary residences. The trade is oversight and a locked scope in exchange for borrowing power the house hasn’t earned yet.

If you’re ready to price a home that needs work, talk to Align Lending. We’ll shop your renovation scenario across our lender network, put 203(k) and HomeStyle quotes side by side, and tell you honestly when a plain mortgage plus savings beats all three. Call 248-506-5727 or start online today.

Footnotes:

1. Align Lending is not acting on behalf of or at the direction of FHA or HUD. FHA 203(k) program rules, mortgage insurance premiums and loan limits are set by HUD in Mortgagee Letters and the Single Family Housing Policy Handbook 4000.1 and are subject to change. Individual lenders may apply additional requirements. Return to text.

2. This is general information, not tax advice. Mortgage interest deductibility depends on your individual circumstances, on whether you itemize deductions, and on when the debt was incurred; limits differ for debt incurred on or before December 15, 2017. Consult a qualified tax professional about your situation. Return to text.

3. Example figures in this article are hypothetical and for educational purposes only; they do not constitute an advertisement of credit terms or a rate quote under federal or state lending laws. Your loan amount, down payment, premiums and eligibility depend on your application, the property’s as-is and after-improved appraised values, your approved scope of work, program limits and market conditions. Return to text.

Figures current as of August 2026; verify with the linked source before relying on them. Sources: Limited 203(k) maximum total rehabilitation cost of $75,000 (raised from $35,000), Standard 203(k) rehabilitation period of 12 months and Limited 203(k) period of nine months, financeable mortgage payment reserve of up to 12 months on a Standard 203(k), and Limited 203(k) ineligibility where repairs prevent occupancy for more than a total of 30 days, HUD Mortgagee Letter 2024-13 (July 9, 2024), effective for FHA case numbers assigned on or after November 4, 2024. Standard 203(k) minimum of $5,000 in eligible improvements, no separate maximum rehabilitation cost, FHA-approved 203(k) Consultant required on Standard and optional (with a financeable fee) on Limited, structural work limited to the Standard version, contingency reserve of 10% to 20% of financeable repair and improvement costs on a structure 30 years or older rising to a 15% minimum where utilities are not operable, and draw limits of five in total (four intermediate and one final) on Standard, HUD 203(k) Rehabilitation Mortgage Insurance Program pages and Single Family Housing Policy Handbook 4000.1, Section II.A.8.a. Maximum of four draw requests per contractor on a Limited 203(k), increased from two, with a scheduled intermediate draw permitted to include two separate disbursements and multiple disbursements per draw allowed on Standard 203(k) files, HUD Mortgagee Letter 2026-06 (June 23, 2026), effective immediately. Maximum 96.5% loan-to-value at a minimum decision credit score of 580 and 90% maximum LTV at 500 to 579, Handbook 4000.1, Section II.A.2. Upfront mortgage insurance premium of 1.75% of the base loan amount and annual premium of 0.55% for the mortgage term above 95% LTV on terms greater than 15 years, HUD Mortgagee Letter 2023-05 and Handbook 4000.1, Appendix 1.0. FHA 2026 one-unit floor of $541,287 and high-cost ceiling of $1,249,125, effective for case numbers assigned on or after January 1, 2026, HUD Mortgagee Letter 2025-23 (December 11, 2025); FHA sets its floor at 65% of the national conforming baseline and its ceiling at 150%. HomeStyle Renovation maximum renovation funds of 75% of the lesser of purchase price plus renovation costs or the “as completed” appraised value on a purchase, 75% of the “as completed” value on a refinance, 50% for manufactured homes; eligible occupancy of one- to four-unit principal residences, one-unit second homes and one-unit investment properties; and do-it-yourself work limited to 10% of the “as completed” value on one-unit properties with reimbursement for materials or documented contract labor but not the borrower’s own labor, Fannie Mae Selling Guide B5-3.2-02. HomeStyle Renovation work completed no later than 15 months from the date the loan is closed with a limited extension not to exceed 18 months, no required improvements or restrictions on renovation type, no minimum dollar amount, improvements permanently affixed (pools, garages, accessory units and recreation rooms acceptable), and no complete tear-down and reconstruction, Fannie Mae Selling Guide B5-3.2-01. HomeStyle Refresh maximum of 15% of the “as completed” appraised value, eligible improvement categories, all one- to four-unit existing properties and occupancy types eligible, and completion no later than 180 days from the note date, Fannie Mae Selling Guide B5-3.3-01. Freddie Mac CHOICERenovation renovation costs capped at 75% and renovations completed within 365 days of the note date, Freddie Mac Single-Family Seller/Servicer Guide and CHOICERenovation fact sheet. Single-closing construction-to-permanent transactions limited to no single construction period of more than 12 months and a total period not exceeding 18 months, with no exceptions granted, Fannie Mae Selling Guide B5-3.1-02. Cash-out refinance maximum 80% LTV on a one-unit principal residence, Fannie Mae Eligibility Matrix; at least one borrower on title for at least six months before disbursement and any existing first mortgage being paid off at least 12 months old, Fannie Mae Selling Guide B2-1.3-03. Fannie Mae 97% LTV options requiring at least one first-time home buyer on a standard purchase, with no first-time requirement under HomeReady, and down payments as low as 3%, Fannie Mae 97% LTV Options and Selling Guide B5-6-01. HELOCs described as a line of credit borrowed against home equity that usually carries an adjustable interest rate, Consumer Financial Protection Bureau. EPA Renovation, Repair and Painting Rule firm-certification requirement for pre-1978 housing and child-occupied facilities, thresholds of more than six square feet of interior painted surface per room and more than 20 square feet exterior, and the estimate that approximately three-quarters of US homes built before 1978 still contain some lead-based paint, U.S. Environmental Protection Agency. Michigan construction codes administered by the LARA Bureau of Construction Codes under the Stille-DeRossett-Hale Single State Construction Code Act, 1972 PA 230, with permit fees paid to the enforcing agency of the jurisdiction before a permit to begin work may be issued, Michigan Department of Licensing and Regulatory Affairs. MI Home Loan minimum credit score of 640 and MI 10K DPA of up to $10,000 as an interest-free loan for down payment, closing costs and prepaid expenses, Michigan State Housing Development Authority. Home acquisition debt defined to include a mortgage taken out to buy, build, or substantially improve a qualified home, with deduction limits of $750,000 ($375,000 married filing separately) for debt incurred after December 15, 2017, IRS Publication 936.

This article is for informational purposes only and is not intended to provide legal, financial, or tax advice. Renovation loan program rules, cost caps, completion deadlines, mortgage insurance premiums, loan limits and state assistance terms change and vary by property, county, program and lender overlay; confirm your figures with your lender and your Loan Estimate, and consult a qualified professional about your situation. Figures shown are illustrative, are not a rate quote or an offer of credit, and are subject to change. Align Lending is an independent Michigan mortgage broker, NMLS #2041154.