Construction Loans for Renovations—Do They Work, and What Alternatives Are There?


Construction loans are short-term financing products typically used by property developers and contractors to build residential and commercial structures. A homeowner never has to worry about building costs unless they’re planning to renovate their home—but are construction loans for renovations viable?

Whether you’re planning property additions or complete remodeling, your renovation strategy can be properly implemented only with the right financing. A generic construction loan may not be the best choice for renovations because they’re not designed for homeowners. Let’s figure out why and dive into the more desirable alternatives.

Construction Loan for Renovations—Is It the Best Option?

Construction loans are unsuitable for home renovation because of the different levels of risk involved. The funding risk influences factors like eligibility requirements and financing costs.

Construction financing is considered risky from a lender’s point of view because there is no hard asset to secure the value of the loan. If a project gets stalled or the finished structure gets no permit due to shoddy work, the entire loan turns into a bad investment. Keeping the aggressive risk in mind, traditional construction financiers have strict entry requirements, which include:

  • Minimum credit score of 720
  • Debt-to-income (DTI) ratio no higher than 36%
  • Extensive project viability reports and builder documentation

Home improvement projects are relatively low-risk. There’s already a livable structure to guarantee the value of the loan, and even if you want to avoid using the house as collateral, the project is scaled-down compared to new construction. Because of the reduced stakes, you can easily secure financing from a wide range of lenders, and the best part is—you’ll have more favorable loan terms than for construction loans.

Source: Gustavo Fring

From a broad perspective, there are three types of products you can request for home improvement work:

  1. Renovation loan—A standalone renovation loan provides you with a percentage of your home improvement budget, often without using collateral. The lending limit is usually up to $100,000
  2. Home equity-based loan—If you have equity in your existing home, you can leverage it and take out some extra cash for repairs. Lenders offer you up to 70% loan-to-value (LTV), so the lending limit depends on your equity
  3. Federal Housing Administration (FHA) loan—FHA’s 203(k) and Title 1 loans are also suitable for property rehabbing, provided you qualify

Explore further details of these options below.

Renovation Loan vs. Construction Loan—Explained

Both renovation and construction loans are applied toward building activities, but the former is tailored for homeowners. Check out the major differences between the products:

AspectConstruction LoanRenovation Loan
Loan sizeNo maximum loan amount$5,000–$100,000
Expense coverageAll construction costsSelected repair and upgrade activities (dictated by the lender)
Down payment10%–50%Not required in most cases
Tenure1–3 years2–12 years
Fund disbursalTo the contractorVaries
Closing costs3%–8%2%–5%

Interest rates for construction and renovation loans typically sit between 7.99% and 24%, depending on your financial history and risk profile. Renovation loans require paperwork about the contractor, budget, and cost composition, so you cannot cut corners by executing a DIY or hiring part-time help.

Got Huge Projects Like Home Remodeling? Equity-Based Construction Loans May Work

Renovation loans are suitable for basic to moderate repairs. If you have remodeling plans that require significant expenses, you can go for home equity loans instead. These products convert your equity (ownership component) value into cash, which means you’re increasing the debt on your home.

Equity loans are popular among homeowners who don’t mind using their property equity to fund renovations. The mortgage product is offered without any specific restrictions. You can use it for repairs, personal expenses, or investment avenues, so there’s usually no need to worry about preparing construction-related paperwork.

Three types of equity loans can help with renovations—check them out:

  1. Home equity loan or second mortgage—You can withdraw a fixed sum based on your accumulated equity. The entire amount is immediately available for renovations. You pay amortized installments over the tenure
  2. Home equity line of credit (HELOC)—HELOC is suitable for gradual renovation work spanning over several years. The product basically converts your equity into a credit line so that you don’t have to pay interest on the undrawn amount
  3. Cash-out refinance—A cash-out refinance rolls your existing mortgage and equity value into a single, larger loan with a fresh rate and tenure. The closing cost will be higher than for the other two options, but you’ll enjoy streamlined monthly payments. The option is suitable if you want to get rid of your existing mortgage

Since your home is on the line, avoid leveraging your equity if you don’t have a viable repayment strategy.

Source: Ketut Subiyanto

FHA Home Improvement Construction Loans—Options

FHA has the following products that can work for rehab and renovation:

  • 203(k) loan—FHA 203(k) loans enable you to purchase or refinance a primary self-occupied home in need of repairs. You can go for:
    • Limited FHA 203(k) for minor repairs (under $35,000)
    • Standard FHA 203(k) for major structural repairs (worth over $35,000)
  • Title 1 loan—FHA Title 1 loans work for existing homeowners who don’t have enough property equity or a decent credit score. You can borrow the following amounts for renovation projects:
    • Up to $25,000 for a single-family home
    • Up to $60,000 for a multi-family home with a maximum of five units

Where To Get a Renovation/Remodel Construction Loan

You can get renovation or equity loans from almost all prominent lenders in the traditional lending space. These lenders offer federally conforming loans (loans that can be sold to Fannie Mae or Freddie Mac), so you can expect a long and intensive screening process. Conforming loans may not always be sufficient for renovations because of low lending thresholds, especially in areas with a high cost of living.

If you want lenient entry requirements and fast funding, you can also go for alternative lenders. They have fewer federal restrictions and can work with poor credit scores and financial blemishes at competitive rates. Since these lenders use private capital to extend loans, their lending threshold is higher, allowing you to execute larger renovation budgets.

Traditional Lender Options

It can take anywhere between 30–90 days for a traditional lender to process your loan. Here are some lenders you can consider for home improvement or equity loans:

LenderLending LimitInterest RatesMinimum Credit Score
Rocket Mortgage$2,000–$45,0007.73%–29.99%640
Navy Federal Credit Union$250–$50,0007.49%–18.00%Negotiable for members
Regions Bank$10,000–$250,0006.625%–14.625%750–800
loanDepot$35,000–$250,000Up to 18%620

Note that these figures do not apply to FHA loans.

Alternative Renovation Loans—Try Hard Money Financing

In the alternative lending market, hard money loans are gaining traction for facilitating quick and effortless renovation work. These are asset-based loans heavily used by real estate investors, businesses, and house flippers to get quick funding. The primary appeal of the product is that you qualify according to the value of the collateral—not your financial standing.

Homeowners typically use hard money loans when they:

In terms of interest rates and financing costs, hard money products may be cheaper than home improvement loans because of the presence of the collateral. Most lenders charge 8%–18% for this type of financing, although you need to watch out for additional costs to make a fair comparison. A handful of lenders have low interest rates but charge a fortune in junk costs, which can sum up to $8,000!

You can find info about the hard money lenders in your area online, but know that they may not always finance owner-occupied properties. If you’re looking for no-nonsense renovation loans available to everyone—Hard Money Loan Solutions can help you out!

Home Improvement, Construction, or Rehab Loan—Hard Money Loan Solutions Finances All!

Whether you’re planning simple or complex renovation construction, allow the real estate experts at Hard Money Loan Solutions (HMLS) to handle the financing! HMLS can provide tailor-made loan packages for any construction scenario, including:

The lending group can set you up with equity and cash-out refinance programs within 3–10 days with minimal paperwork. You can also request special home improvement loans by offering another collateral, which can be a different property or even a non-real estate asset. HMLS does not offer personal (non-collateral) loans.

HMLS is headquartered in Delray Beach, Florida. You can request financing online and access funds from the comfort of your home—reach out to the group today to get a personalized package!

Source: Andrea Piacquadio

HMLS real estate loans comply with relevant state and federal guidelines, but since you’re tapping into private capital, you can borrow up to $50 million. Go through the group’s standard lending components below:

Loan size$100,000–$50,000,000
Interest rates9.99%–12%
Term1–3 years
Interest rate typeFixed
LTVUp to 70%
Origination fee2 points or 2%
Closing time3 days to 2 weeks
AmortizationInterest only 
Down paymentNot required
Prepayment penaltyNo penalty after 6 months
Eligible borrower Business entities
Property developers
Rental property owners
Foreign nationals can also apply 
Eligible propertyAny residential, commercial, or special-use structure

How To Qualify for HMLS Renovation Loans

The applicant screen process at HMLS is fast and straightforward. If the collateral has enough equity, you will get the loan—as it’s the most tangible form of guarantee a private lender can hope for. HMLS never asks for extensive paperwork that delays funding, so you won’t have to bother with preparing bank statements, tax returns, or even a credit report.

For renovation loans, HMLS likes to look at proposed construction work, but you don’t need to arrange documentation for low-intensity repairs. The group is also open to funding DIYs, provided the borrower has the expertise to carry out the project. If you’re new to home improvement work, request one-on-one guidance from HML, and the team will help you complete the project successfully.

Applying for an HMLS loan takes mere minutes—here’s how you proceed:

  1. Access the online loan application page
  2. Enter your contact info
  3. Specify the loan amount and provide details about the collateral
  4. Add a customized message if you want to
  5. Submit the form

HMLS experts will do a quick viability check and contact you to discuss the funding. The group practices transparent communication and knowledge exchange. Once you’re approved, HMLS guarantees to fund your project.

Source: Google Reviews

HMLS is a 5-star rated hard money lender with a knack for funding complicated deals. They can also assist borrowers with loans for:

Cost Components of HMLS Loans

HMLS sticks to a simple pricing structure that includes the interest rate, closing expenses, and legal fees for getting the documents in order. You’re never levied with junk costs such as processing or rate-lock fees. Get free consultancy from the HMLS lending team for details about active renovation packages and funding costs applicable to your situation.

Featured image source: Tima Miroshnichenko

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