Get the Funds to Renovate Your Home with a Construction Loan

Have you been dreaming of a major renovation or addition to your existing home? Whether you want to add a second story, finish the basement, or do a complete kitchen or bathroom remodel a construction loan can provide the financing needed to make your home improvement dreams a reality.

A construction loan is a short-term loan that provides funds specifically for construction projects on an existing home. With a construction loan, you can borrow against the equity in your home to pay for costs like materials, permits, labor, and more. Then, once the project is complete, you can choose to pay off the loan or refinance into a traditional mortgage.

What is a Construction Loan on an Existing Home?

A construction loan on an existing home, also called a renovation loan, is a loan that allows you to finance major renovations or additions to a home you already own It works similarly to a regular construction loan, with a few key differences

• The loan is secured by the home you already own rather than land or unfinished construction. This makes qualification easier than a new construction loan.

• Funds can only be used for home renovations, not for purchasing land or building a home from the ground up.

• Loan terms are usually shorter, from 6 months to 1 year, suitable for most renovation timelines.

• Instead of draws paid at project milestones, the lender may release the full loan amount upfront since part of the home already exists as collateral.

• Interest rates may be lower than a construction loan since the bank’s risk is lower with an existing structure as security.

Overall, a home renovation loan provides flexible financing to remodel, expand, or upgrade your current house over a short time period.

What Can a Construction Loan on an Existing Home Cover?

A construction loan for an existing home can finance almost any major home renovation project, including:

• Adding a room addition or second story

• Finishing an attic, basement, or garage into living space

• Major kitchen or bathroom remodels

• Replacing a roof, siding, windows, or doors

• Upgrading electrical, plumbing, HVAC, or insulation

• Swimming pools and outdoor living additions

• Accessibility renovations like ramps, lifts, or roll-in showers

• Any other major upgrade or reconfiguration of living space

The loan amount available depends on how much equity you have built up in your home. Typically lenders will let you borrow up to 85% of your home’s value minus what you owe on your current mortgage.

What Are the Benefits of a Home Renovation Loan?

There are many advantages to using a home renovation loan over other financing options:

• Use your home’s equity – Tap into your available home equity rather than relying on personal savings or other loans.

• Pay over time – Repay the loan over 5-30 years by refinancing which spreads costs over time rather than paying lump sum.

• Consolidate into one loan – Combine the cost of improvements into your overall mortgage instead of taking out multiple small loans.

• Often lower rates – May offer better rates than personal loans or home equity loans/lines.

• Increase home value – Improvements can boost your home value, allowing you to borrow more and build equity.

For major renovations, a construction loan leveraging home equity is usually the most cost-effective approach compared to other financing methods.

What Are the Requirements to Qualify for a Home Renovation Loan?

While construction loan requirements are less stringent for existing homes than new builds, you still need to meet some basic criteria to qualify and get approved:

• Credit score – Most lenders require at least a 620 credit score, but scores of 700+ get the best terms.

• Down payment – At least 15% equity in the home is usually required to tap for the loan.

• Debt-to-income ratio – Your total monthly debt payments, including the new loan, should not exceed 43% of gross monthly income.

• Home value – There must be enough equity in the home after the renovation to secure the loan.

• Construction plans – Detailed renovation plans and contracts are required before loan approval.

As long as you meet these requirements, have sufficient home equity, and provide all needed paperwork, approval is a smooth process.

How Much Does a Construction Loan Cost on an Existing Home?

Construction loans have costs similar to other mortgages, including:

• Interest – The ongoing cost of borrowing, based on loan amount, term, and your credit. Rates for renovation loans often range from 3% to 8%.

• Origination fees – Upfront fee to initiate the loan, around 1-2% of the total loan amount.

• Other closing costs – Typical closing fees like appraisal, application fee, attorney fees, recording fees, etc. Total usually 1-3% of loan amount.

• Inspection fees – Lender may charge inspection fees at certain project milestones to approve draw payments.

To get the best deal, compare total costs from multiple lenders. Online lenders often offer the lowest construction loan rates and fees.

How Do You Get Approved for a Home Renovation Loan?

Follow these steps for the approval process:

1. Determine your budget and scope of renovations. Get quotes from contractors.

2. Check your home equity and loan eligibility based on credit score and debt-to-income ratio.

3. Choose a lender and apply for preapproval by submitting financial docs and renovation plans.

4. After preapproval, you can finalize renovation designs and contractors.

5. Submit final plans, contracts, and permits to the lender for full approval.

6. Once approved, close on the loan and the funds will be available to start your project!

Working with an experienced loan officer makes the process smooth. Be prepared with all required paperwork and realistic renovation specs.

Tips for Managing Your Home Improvement Construction Loan

Follow these tips once your home renovation loan closes:

• Review all loan draw terms and inspection requirements to avoid delays

• Build contingencies into your project budget for unexpected overages

• Communicate frequently with the lender and provide all requested updates

• Carefully manage payments to contractors and track expenditures

• Adhere to the approved renovation specs – changes may require lender approval

• Watch out for contractor scams; only make payments for completed work

• Make sure all necessary permits and inspections are handled for each phase

• Be prepared to make interest payments during the renovation period

Proper oversight of budgets, contractors, and inspections ensures your project stays on time and on budget.

Ready to Renovate with a Construction Loan?

Planning a major addition or remodel? A construction loan against your home’s equity can provide an affordable, accessible option to finance your next home improvement project. If you meet lender qualifications, the loan approval process is fairly straightforward. With your renovations financed upfront, you can reinvent your home and increase its value for decades to come. Consult a loan officer today to discuss construction loans and kickstart your remodeling plans!