How it works
The loan is sized against the ARV rather than the purchase price, so you can borrow more than the house is worth today. A HUD consultant is required to write the work plan and inspect each phase. Funds are held in escrow and released on a DRAW as work is completed, and up to six months of payments can be financed if the home is unlivable during construction.
A home costs $300,000 but needs $100,000 of major work. Instead of finding separate purchase and construction money, a renovation loan can combine eligible acquisition and improvements into one financing structure based partly on the completed property.
Who it can work well for
Buyers taking on a distressed or dated property who do not have renovation cash on hand. The only mainstream program that finances structural work on an owner-occupied home.
What lenders actually look at
The lender reviews the borrower like an FHA borrower and also underwrites the project: scope of work, contractor, bids, consultant documents when required, contingency reserves, appraisal subject to completion and draw administration.
Illustrative lender guidelines
These are educational examples, not universal approval rules. Exact requirements and maximum leverage vary by lender and complete scenario.
| Scenario | Credit / qualifier | Illustrative leverage |
|---|---|---|
| Purchase + rehab | 580+ | 96.5% of ARV |
| Purchase + rehab | 500-579 | 90% of ARV |
| Minimum rehab budget | — | $5,000 |
| Maximum rehab budget | — | No cap (county limit applies) |
| HUD consultant | — | Required |
What to watch for
The consultant, inspections, and draw process add real time — plan on a longer close than a standard purchase. Contractors must be approved and licensed, and you cannot do the work yourself.
Common misconception: the renovation funds are handed to the borrower at closing. They are generally controlled and released through a draw process as work is completed.
When this may not be the best choice
A standard 203(k) can be cumbersome for a simple cosmetic project, an investor property, a borrower who needs to self-perform work, or a project whose timing cannot tolerate draw/consultant requirements.
Common questions
Related programs
Want to see what may fit your scenario?
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