Can You Add Renovations to a Mortgage When Purchasing?

Rehabilitation mortgage programs increase a fixer-upper's appeal.

renovation image by jeecis from

You may add renovation costs to your total mortgage at the time you buy a house as long as the mortgage program you choose allows the expenditure. The Federal Housing Administration -- FHA -- and the Federal National Mortgage Association -- Fannie Mae -- are government agencies that sponsor rehabilitation mortgage programs. Private lenders might also provide similar loan products. You’ll have to ask.

203(k) Rehab Mortgage Insurance

The Federal Housing Administration approves lenders to offer home buyers 203(k) Rehab Mortgage Insurance. Under this financing program, FHA insures the loan, protecting both lender and borrower. This type of mortgage finances the house purchase minus a down payment as it also absorbs the cost of repairs and renovations. It leaves the buyer with one single debt, the balance of which usually carries a lower interest rate than a stand-alone home-renovation loan.

HomeStyle Renovation Mortgage

The Federal National Mortgage Association started out as a federal agency and 30 years later, in 1968, it became a Congress-chartered private financial institute. Fannie Mae sponsors the HomeStyle Renovation Mortgage program. Like FHA, Fannie Mae does not lend directly to the buyer, but the agency approves and backs financial institutions to provide home mortgages. Under this program, borrowers may also consolidate their home-buying and repairing debt in one account.

How 203(k) Rehab Mortgage Works

The home that you buy and repair with a 203(k) Rehab Mortgage must be a minimum of a year old and the cost of rehabilitating it at least $5,000. After the seller is paid, the renovation money is deposited in an escrow account. The financial institution holding the money pays for the repairs as they occur. Polyana da Costa writes on the website Fox Business that FHA gives the buyer six months to complete the project and the right to request up to five payments for the contractor during that time. In addition, a construction consultant hired by the borrower must inspect the home before each payment is disbursed.

How HomeStyle Renovation Mortgage Works

A renovation escrow account is set up under the HomeStyle Renovation Mortgage program to hold the portion of the loan set aside for repairs. The financial institution keeping the money pays for the renovations with a check written jointly to the buyer and the contractor. The escrow account accrues interest, and any leftover cash may be used for non-essential repairs or applied against the principal balance of the mortgage. Like FHA, Fannie Mae also requires inspections after each repair is completed before payment is issued. The HomeStyle Renovation Mortgage pays for repairs costing up to as much as half of what the home is expected to be worth after rehabilitation is completed. Da Costa, of Fox, says the FHA program approves borrowers with a credit score of 640 or more and requires as little as 3.5 percent as a down payment. In the same Fox Business article, from August 2011, da Costa quotes loan officer Leesa Sandoval, who said Fannie Mae prefers a credit score of 740 and 10 percent down.