Home Renovation Loans: What They Are & How to Use Them

Whether it’s a cosmetic update or a total rehab, renovation projects are a routine part of residential real estate investing. Whether the goal is to prepare a rental property for occupancy, upgrade a short-term rental, or improve returns on resale, renovations can help maximize the value of an investment.

A home renovation loan can be a key part of a property’s profit strategy, providing the capital needed to complete upgrades efficiently and strengthen the quality, performance, and market value of an investment portfolio. Choosing the right loan can infuse investments with cash, while preserving liquidity and moving projects forward quickly. 

In this article, we explain how renovation loans work, the most common financing options available, and what investors should consider when selecting a loan product. 

What Is a Home Renovation Loan?

A home renovation loan is a broad term that refers to any financing used to renovate, repair, or improve an existing property. These loans are often used when purchasing a fixer-upper, updating or expanding an existing income property, or modernizing an investment property. Depending on the loan type, funds may be used for projects ranging from minor updates to substantial renovations.

Renovation financing can take several forms, including:

• Home equity loan or home equity line of credit (HELOC)
• Cash-out refinance
• Personal or business loan
• Specific mortgage products with built-in improvement funding
• Specific-use renovation loan with project-based disbursements

These funding options vary widely in structure, leverage, underwriting requirements, and how funds are disbursed. Some provide flexible cash for general use, while others are specialized real estate loans with structured disbursements and inspections.

Types of Renovation Loans

Investors have several options to finance renovations.

Home equity loan or home equity line of credit (HELOC)

Home equity loans and home equity lines of credit both leverage the property’s existing equity to fund repairs or improvements. Home equity loans disburse funds in a lump sum, typically with a fixed interest rate and immediate repayment schedule. HELOCs offer a revolving line of credit, often with variable interest rates, allowing borrowers to draw and repay funds as needed.

Because these loans are secured by the property, borrowing capacity depends on available equity, the remaining mortgage balance, and borrower qualifications.

Cash-Out Mortgage Refinance

A cash-out refinance replaces an existing mortgage with a new loan that is larger than the current balance. The difference is paid out to the borrower in cash. A cash-out refinance can be an effective way to access funding for long-term investment properties with more than 20% equity. 

Personal or Business Loan

Personal and business loans are often the most flexible financing options for small to moderate repairs, allowing borrowers to access general funds that can be used for nearly any renovation need. However, they often provide the least amount of funding. Personal and business loans may be unsecured or secured, using the borrower’s home, car, or other assets as collateral.

In some cases, SBA 7(a) and SBA 504 loans, both backed by the Small Business Administration, may be used for eligible property acquisitions, repairs, and upgrades. Occupancy requirements do apply, meaning that these loans are not a fit for purely investment properties with no owner occupancy.

Mortgage products with built-in renovation funding

Some mortgage products combine purchase financing or refinancing with renovation funding in a single-close mortgage loan. These programs can be useful when purchasing a fixer-upper that needs immediate improvements or updating an existing investment property.

Conventional renovation financing options include real estate loans from Fannie Mae and Freddie Mac. These combined mortgage and renovation loans can be used to improve non-owner-occupied properties and may cover projects ranging from cosmetic upgrades to full renovations. 

For owner-investors looking to enter the market, FHA 203(k) Loans and VA Renovation Loans allow investors to purchase and renovate properties with up to four units. These government-backed loans do require the borrower to occupy one of the units as a primary residence for at least 12 months. 

Renovation-Only Loans

A renovation-only loan provides funding for repair or improvement work without bundling the financing into a purchase mortgage or refinance.

These specific-use loans typically use draw schedules to release funds based on project milestones. Borrowers may need to provide a detailed scope of work, budget, contractor information, and project timeline before funding is approved. Regular inspections are required to verify that work has been completed before additional funds are released.

For investors managing larger or more structured renovation projects, a home renovation loan can provide a clearer framework for execution and disbursement.

When Investors Use Renovation Loans

Renovation loans are a common strategy for investors and serve a wide range of business purposes. Some of the most common use cases include:

• Preserve liquid capital for operations, other acquisitions, and other business needs
• Fund improvements intended to raise the property’s fair market value to prepare for a sale or generate higher rental income
• Complete repairs needed to stabilize a distressed or outdated property
• Increase equity across an investment portfolio
• Reposition a property for refinance, disposition, or improved performance in your portfolio

How to Choose the Right Home Renovation Loan

The right renovation loan for your project depends on a number of factors, far beyond the cost of the project alone. Investors should consider:

• The scope of work
• Property type and unit count
• Available assets and equity
• Whether it’s a current holding or a new acquisition
• Project timeline

Your credit score, intended investment strategy, and whether you intend to use part of the property as your primary residence also impact your options.

Common Renovation Financing Options

Below are some of the most common home renovation financing options available to investors and owner-occupant investors.

 

Loan Type	Description	Key Details
Cash-Out Refinance	Mortgage refinance with a cash-out option that can be used for any renovation and repair project.	Requires refinancing of existing loan Credit minimums vary by lender At least 20% home equity required May pay closing costs
Fannie Mae HomeStyle Loan	Combined mortgage and renovation loan that can be used for any renovation or repair project, up to 75% of the home’s projected value after renovations.	Low down payment (typically 5%) Credit minimums vary by lender Requires licensed contractor for repairs
FHA 203(K) Loan	Combined mortgage and renovation loan for owner-occupant investors that can be used for standard, non-luxury renovation or repair projects.	Luxury upgrades prohibited Minimum loan amount of $5,000 12 months maximum to complete repairs 580 minimum credit score requirement 3.5% or 10% down payment required, depending on credit Property may include up to 4 units, as long as one is owner-occupied as a primary residence.
Freddie Mac CHOICERenovation Loan	Combined mortgage and home repair loan that can be used for any renovation or repair project, up to 75% of the home’s projected value after renovations.	Low down payment  Credit minimums vary by lender Includes a contingency reserve for unexpected costs Allows up to 50% of the loan funds to be withdrawn at closing
Home Equity Line of Credit (HELOC)	An as-needed line of credit backed by existing property equity, available for all renovation and repair projects depending on the amount of equity available.	Typically features variable interest rates, with payments based on the amount drawn Interest paid only on the amount of credit used Able to withdraw funds as needed Payment of principal can be delayed
Home Equity Loan	A loan that borrows against existing property equity, available for all renovation and repair projects depending on the amount of equity available.	Fixed rates Payment received in a lump sum Available for primary, secondary, or investment properties Credit minimums vary by lender Repayment on the full loan amount typically begins immediately
Personal or Business Loan	A flexible loan that can be used for a wide range of renovation projects or repairs.	Credit minimums vary by lender Full amount available at closing Some loans may be capped at $50K, limiting large renovation projects SBA loans require partial owner occupancy.
USDA Renovation Loan	Not available for investment properties.
VA Renovation Loan	Combined mortgage and home repair loan for owner-occupant investors, which can be used for renovations or repairs related to livability or accessibility. Borrower must be a veteran or active service member.	Upgrades can only be related to livability, including safety and accessibility; no cosmetic upgrades permitted 620 minimum credit score requirement Contractor must be VA-approved 120 days maximum to complete repairs Requires inspections and scheduled disbursement directly to contractors Total financing limited to 100% of the total expected value of the home after repairs Property may include up to 4 units, as long as one is owner-occupied as a primary residence.

Renovation Loans FAQs

What financing options are available for home renovations?

Home renovations can be financed through several types of loans, including home equity loans, HELOCs, cash-out refinancing, personal or business loans, and renovation-specific mortgage products like FHA 203(k) or Fannie Mae HomeStyle loans. The best option depends on available equity, borrower qualifications, investment strategy, and the scope of the renovation project.

Can renovation loans be used for investment properties?

Investors have access to a variety of renovation loans, including Fannie Mae HomeStyle loans, Freddie Mac CHOICERenovation loans, and other private lending programs. While government-backed options like FHA 203(k) and VA renovation loans are limited to primary residences, eligible properties may include up to four units as long as one is owner-occupied.

How are renovation loans distributed?

Many renovation loans distribute funds in phases, known as draw schedules. Funds are released as construction milestones are completed and inspected, helping ensure that the renovation project stays on track and within budget.

Get Started With Ternus Today

If you’re planning to renovate or improve an investment property, the right loan can help you move quickly and maximize returns. At Ternus, our loan programs include:

• Fix-and-flip loans
• Bridge loans
• Wholetail loans
• DSCR loans
• Transactional funding

Connect with our team today to learn more about how Ternus can help you finance your next project.