Can You Include Upgrades in a Mortgage?

While the Federal Housing Administration (FHA) normally only guarantees mortgages on homes that pass its strict appraisal standards, its 203K Rehabilitation Insurance (203K)and Energy Efficient Mortgage (EEM) programs let you borrow additional funds for improving your home. The 203K program insures a loan that includes both the cost of your home and money to pay for its repair. As the contractors complete their work, they receive payment from an escrow account established with funds from the 203K Loan. The EEM program helps buyers pay for improvements that make the house more energy efficient. Homebuyers can combine the 203K and EEM when taking out a mortgage.

If getting out of the city appeals to you, a loan guaranteed or issued by The U.S. Department of Agriculture (USDA) can help. USDA loans help people with low or moderate incomes get a home, usually with no money down. If your little house on the prairie needs some work, you can roll the cost of needed repairs made by licensed contractors into your 30 year, fixed-rate mortgage.

Veterans Affairs (VA) mortgages are an option if either of you has a military background. You can use your VA loan to buy, build, or buy and repair a home. The VA can also lend you extra money to improve your home's energy efficiency.

Some mortgage lenders offer loans that combine a traditional mortgage with financing for home construction or major repairs. The lender will first finance the repairs, and then will apply some of the fees to a mortgage loan. The advantage to this is that you'll only have to secure financing once, though your lender will want to make sure that both your home, proposed repairs and contractor meets its underwriting standards. There is also the risk of paying too much for the mortgage because you may lock yourself into working with a lender whose rates are higher than other lenders when you are ready to secure your mortgage.