How does a renovation loan set my budget?
A renovation loan budgets two numbers together: the price to buy or refinance the home, and the cost of the work. The lender appraises the home for its as-completed (post-renovation) appraised value and underwrites the combined loan to that figure, which is what lets you finance improvements before they exist. Each program then applies its own ceiling on the renovation portion, and holds that money in escrow to release as the work is inspected and completed.
What is after-renovation value, and why does it matter?
After-renovation value, the as-completed or as-improved appraised value, is what the home is expected to be worth once the planned work is finished. All three main programs, FHA 203(k), Fannie HomeStyle, and Freddie CHOICERenovation, underwrite to it rather than to today's condition. That is the whole point of a renovation loan: your borrowing capacity follows the finished home, not the fixer-upper. The catch is that the appraisal has to support the value before the money is approved.
How much of the value can go to renovation?
On Fannie HomeStyle, renovation funds are capped at 75% of the lesser of the purchase price plus renovation cost or the as-completed appraised value; manufactured homes are limited to 50%. Freddie CHOICERenovation uses the same 75%-of-as-completed-value cap. Freddie's streamlined CHOICEReno eXPress is for smaller scopes, with renovation funds limited to 10% of value (15% in designated high-needs areas). The cap sets the ceiling; your credit, income, and the appraisal set the rest.
How does FHA 203(k) size the loan?
The FHA 203(k) builds the loan on the as-improved value and must fit within your county's FHA loan limit, so the limit and the appraisal together cap what you can do. The 203(k) Standard handles structural and major work with a $5,000 minimum repair; the Limited path covers non-structural repairs up to $75,000 in total work. That $75,000 cap is reviewed by HUD and is not permanent, so I confirm the current figure for your file rather than treat it as fixed.
How does the money reach the work?
You do not get the renovation funds as a lump sum. Renovation funds sit in escrow and release in draws against inspection; a portion may fund at or near closing and a final holdback releases on certified completion. In practice, that means the contractor is paid in stages as each phase is finished and signed off, which protects you and the lender from paying for work that was never done. Budgeting around this matters: your contractor needs to carry early-stage costs until the first inspected draw releases.
What is the contingency reserve, and how much is it?
A contingency reserve is money held back at closing to cover overruns and surprises found once walls are open. On the FHA 203(k), the reserve basis is this: Scope-and-age determined (required where utilities are off or the scope warrants a reserve). The exact percentages are set by current HUD guidance and depend on the scope and the age and condition of the home, so I confirm them against the Handbook for your file rather than print a number that may be out of date.
On Fannie HomeStyle, a contingency reserve is 10% for two-to-four unit properties (a lender may raise it to 15%) and optional on a one-unit home, depending on the project. Freddie CHOICERenovation does not publish a single fixed full-program contingency figure I will quote from memory; the streamlined eXPress path runs a 10-20% (at least 15% if utilities are inoperable) reserve. Whatever the program, unused contingency funds typically reduce your loan balance rather than become extra cash.
How do I estimate my renovation borrowing capacity?
The honest estimate needs three inputs: the home's purchase price or current value, a contractor's bid for the work, and the appraiser's after-renovation value. From there the program cap and your credit and income decide the number. I run this with you so the figure is real, but a quick self-estimate helps you frame the conversation.
Conventional renovation capacity FHA 203(k) maximum mortgage FHA 203(k) refinance
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Related loan program: Renovation loans. See all your renovation financing options on the renovation loan hub.