Most lenders use the pre-renovation fair market property value to determine the loan amount they are willing to lend you. Most lenders are usually willing to lend up 80% to 90% of the pre-renovation property value and this guideline applies to both standard mortgage programs and home equity loans or lines of credit (HELOC). In your case, you have equity in your property but not enough to finance the the renovation you want to do, especially when lenders apply an 80% to 90% loan-to-value (LTV) ratio limit.
There are some lenders such as credit unions or regional banks that may be willing to lend you up to 80% of the post-renovation value of your property but these lenders may impose stricter qualification guidelines and may not offer you the loan amount you want.
Your best financing option may be home renovation mortgage programs such as the construction to permanent (C2P), FHA 203(k) and HomeStyle Renovation programs that do use the post-renovation property value to determine what size loan you qualify for. I have outlined these program below and we provide comprehensive overviews of each program on FREEandCLEAR. Click on the blue program title below to review detailed information about each program.
Construction to Permanent (C2P). A construction to permanent loan, or C2P loan, enables a borrower to finance the cost of building a new home or significant renovations, including for a tear-down or fixer upper, with a single mortgage.
FHA 203(k). The FHA 203(k) Loan Program enables home owners to finance both the purchase of a home as well as the cost of significant rehabilitation, remodeling and repairs to the home with one FHA mortgage.
HomeStyle Renovation. The Fannie Mae HomeStyle Renovation Mortgage program is similar to the FHA 203(k) program and enables borrowers to purchase a home that needs renovations or refinance the mortgage on their existing home and include funds for renovating the property in the loan amount. Unlike the FHA 203(k) program, the HomeStyle Renovation Mortgage program does not charge a one-time and ongoing FHA mortgage insurance premium.
We also offer a comprehensive explanation of How to Get a Mortgage on a Fixer Upper that may be useful for you to review. Although your situation is not exactly a fixer upper, there are some similarities and I think you will find this resource helpful.
After reviewing the resources on FREEandCLEAR we recommend that you contact multiple lenders to understand how they would handle your unique situation. You can review lenders in your area by clicking INTEREST RATES We advise you to contact at least four lenders as not all lenders offer home renovation mortgage programs. Be sure to ask about construction to permanent (C2P) loans as well as the FHA 203(k) and HomeStyle Renovation mortgage programs when you speak with lenders.