Can I Roll Renovation Costs Into a Mortgage?

Some homebuyers see a fixer-upper as a series of potential headaches, while others see them it an opportunity to spruce up a home and jack up the value of their investment. If you’re one of the latter, finding the cash to renovate a bathroom may be more difficult than getting the job done. If you’re looking for a home that needs a bit of love, you may qualify for a loan that rolls remodeling costs into your mortgage payment.

The Federal Housing Administration’s 203(k) loan program was specifically crafted to help homebuyers pay for the purchase of a home and renovations with the same loan. As part of this loan, you must hire a contractor to devise renovation plans and project costs, and each dollar spent on the home must be used to raise its value.

You may perform the work yourself, but your approved contractor must periodically inspect your work and approve more funding. If you go this route, you’ll need to finish the work within six months of moving in.

Hiring a contractor to watch over your work can be intimidating, and you’ll need to submit piles of paperwork for a standard 203(k) loan. If your home-improvement plans are modest, though, you may qualify for the streamlined 203(k) program.

Borrowers who don’t need more than $35,000 to complete their project may apply for a streamlined loan, as long as the job doesn’t involve major structural renovations. You’ll have to deal with less paperwork and you won’t need to coordinate your work with a contractor.

Fannie Mae’s HomeStyle Remodeler mortgage is a government-backed loan designed to help do-it-yourselfers pay for work on their new homes. Fannie Mae requires all borrowers to hire a contractor to draw up detailed plans, including cost estimates, for remodeling work, which must then follow the submitted specs.

Do-it-yourself projects are allowed at the lender's discretion, but DIY financing cannot exceed 10 percent of the completed value. If the project exceeds $5,000, inspections are required. As with the FHA’s program, lenders require that a remodeling project boost the value of the home.

In some cases, when you purchase your future dream home, it’s such a wreck that it’s not fit to live in until you complete some basic improvements. While that could put you in a tight spot -- paying for your habitable home and your fixer-upper at the same time -- the FHA also allows you to roll the cost of six months principal, interest, taxes and insurance into your mortgage, giving you a means to delay paying for the home for six months until the work is done and you move in.