The home improvement loan you can qualify for depends on your current property value and mortgage balance. Most lenders use the pre-renovation fair market property value to determine how much you can borrow with a home improvement loan. The higher your property value and lower your current mortgage balance, the higher the home improvement loan you can afford.
Most home improvement loan guidelines permit a maximum combined loan-to-value (CLTV) ratio of 80% to 90%, which means you can borrow 80% to 90% of the value of your property before any renovations. Your CLTV ratio equals your current mortgage balance plus your home improvement loan relative to your current property value.
Using the pre-renovation property value means you qualify for a smaller loan amount than you would if the lender used post-renovation property value. In short, despite the name, lenders usually do not give you credit for the property upgrades you intend to make with a home improvement loan.
For example, if your property value before home improvements is $100,000, your mortgage balance is $60,000 and the lender uses an 85% maximum CLTV ratio, you are eligible for a $25,000 home improvement loan.
Home Improvement Loan Example
Mortgage Balance: $60,000
+ Home Improvement Loan: $25,000
= Total Loans: $85,000
/ Pre-Renovation Property Value: $100,000
= CLTV Ratio: 85%
You need to qualify for the loan based on your credit score, debt-to-income ratio, employment status and other factors but this example helps you understand how a home improvement loan works.
Lenders typically use the pre-renovation property value to determine your CLTV ratio and the maximum home improvement loan you are eligible for because this approach provides the most protection for the lender. In the event that your home renovations are not completed, do not go as planned or do not result in the property value increase that you expect, the smaller the loan the lender provides you, the better, at least from the lender’s perspective.
It is important to highlight that home improvement loan guidelines vary by lender. For example, there is a significant difference in the loan amount you are eligible for if the lender applies a CLTV ratio of 90% instead of 80%. Using the higher ratio can increase your maximum loan amount by tens of thousands of dollars so it is important to shop several lenders for a home improvement loan.
The table below shows home equity loan and HELOC terms for leading lenders. You can use these programs to finance property renovations and the terms are similar to a home improvement loan. We recommend that you contact multiple lenders to find the loan that best meets your needs.
If you want to make significant property renovations then a home improvement loan may not enable you to access enough funds because of the way lenders determine the maximum loan amount. For example, if your property is valued at $100,000, your current mortgage balance is $80,000 and you want to make $20,000 in property upgrades, a home improvement loan would not work because you exceed the maximum CLTV ratio permitted.
In this scenario, the better financing option is to use a home renovation mortgage program, which enables you to refinance your current mortgage and include the cost of significant home improvements in the loan amount. Also known as fixer upper mortgages, these programs use the post-renovation property value to determine your maximum mortgage, which enables you to qualify for a higher loan amount than you would with a home improvement loan. Home renovation mortgage programs also usually permit a higher loan-to-value (LTV) ratio, which increases the mortgage amount you are eligible for.
For example, if the lender applies a 97% LTV ratio and the post-renovation value of your property is $120,000, you may qualify for up to a $116,400 mortgage. You can use this loan to pay off your current mortgage balance and finance your home improvements.
Review Best Home Renovation Mortgage Programs
Home renovation mortgage programs are provided by traditional lenders such as banks, mortgage brokers and credit unions. We advise you to contact multiple lenders in the table below to learn more about the programs they offer and current mortgage terms.
The most popular home renovation mortgage programs include the HomeStyle Renovation, CHOICERenovation, FHA 203(k) and Construction-to-Permanent (C2P) programs. I have summarized each program below and you can click on the program title to learn more detailed information about eligibility guidelines and qualification requirements.
HomeStyle Renovation Program. This program enables borrowers to refinance the mortgage on their existing home and include funds for renovating the property in the loan amount. The HomeStyle Renovation Program permits an LTV ratio of 97% for a single unit, owner occupied property financed with a fixed rate mortgage. You are required to pay monthly private mortgage insurance (PMI) if your LTV ratio is greater than 80%.
CHOICERenovation Mortgage Program. This program enables you to refinance your current mortgage and finance significant property improvements with a single mortgage. The CHOICERenovation Program allows a maximum LTV ratio of 97% for a single family residence and can also be used for multifamily properties with up to four units, although a lower LTV ratio applies.
FHA 203(k) Program. This program enables you to refinance your mortgage and include the cost of significant home rehabilitation, remodeling and repairs with a FHA home loan. The FHA 203(k) program allows a maximum LTV ratio of 97.75% for a refinance. The program requires your to pay an upfront and monthly FHA mortgage insurance premium (MIP) which is an extra closing cost and ongoing expense.
Construction to Permanent (C2P) Program. A construction to permanent mortgage, or C2P loan, enables you to refinance your current mortgage and finance the cost of major renovations with a single mortgage. A C2P loan typically uses a lower LTV ratio -- approximately 80% -- than the home renovation programs outlined above but you may be able to qualify for a higher mortgage amount because the other programs apply loan limits.
You can use the FREEandCLEAR Lender Directory to search over 3,900 lenders by location, type and loan program. For example, you can search for lenders in your state that offer multiple home renovation mortgage programs.
"HomeStyle Renovation." Mortgage Products. Fannie Mae, 2020. Web.
"CHOICERenovation Mortgages." Single Family. Freddie Mac, June 2019. Web.
"203(K) Rehab Mortgage Insurance." Federal Housing Administration. U.S. Department of Housing and Urban Development, 2020. Web.
"Construction-to-Permanent Financing: Single-Closing Transactions." Mortgage Products. Fannie Mae, August 2019. Web.