What Are Renovation Loans, and How Do They Work in California? [2021 Update] (2024)

Those new to the homebuying market here in California may wonder why you occasionally hear about “RENO loans.” Isn’t Reno in the next state over?

RENO is actually short for “renovation,” and RENO loans are a useful option for some homeowners and homebuyers. You can hear exactly what our experts have to say on the subject in their highly informative video What the H#%* Are Renovation Loans?—but you can also start here to learn the answers to two often-asked questions on the topic: ​​What are renovation loans, and how do they work in California?

What Is a RENOVATION Loan?

A renovation loan (RENO) is a loan for those looking to buy a home that they intend to renovate in some way. These renovations can be purely optional—like an updated kitchen or a major addition—or absolutely essential—like structural repair or fixing fire damage.

So if you’re shopping around for a house and find a place that’s almost perfect (or one that’s in poor shape but in the perfect location), you can use a renovation loan to purchase the home and turn it into your dream home.

But renovation loans aren’t only for people looking to buy a new place. If you already own a home that needs some updates or repairs, you can refinance into a renovation loan that provides financing based on the future appraised value of your home after renovations. RENO loans are a great option for remodels or home improvements if you don’t have enough cash on hand or equity in your house to cover them.

The experts at New Way Mortgage went into some of the specifics about when a refinance renovation loan is the best option, but generally speaking if you’ve got a house—or are thinking of buying a house—that needs any kind of major cosmetic changes, remodeling, or repairs, you may want to consider a renovation loan.

What Projects Qualify for a Renovation Loan?

You can remodel your kitchen, add a new master bedroom suite, another story, or even a pool under a renovation loan. Our experts at New Way Mortgage dive deep into the details on what repairs qualify for a renovation home loan. But what home renovations are not covered?

A RENO loan will not allow you to knock down the whole structure and start from scratch. But as long as you’re not making changes to the home’s existing structure, or buying furniture with the funds, pretty much any remodel is acceptable with the right renovation loan.

Home Renovation Loan Process

If the upsides of a RENO loan make it sound too good to be true—or at least too good to be simple to obtain—don’t worry. The process of qualifying for a renovation loan is almost exactly the same as getting a regular mortgage. The personal information and paperwork—proof of income, credit score, and so on—you need to get a standard home loan are also required to get a RENO loan.

The only difference in the renovation home loan process is that the lender is factoring the loan amount based on the total cost of the remodel or home improvements (as if the work has already been done), and the future appraised value of your home once these improvements are completed. Because of this, you’ll need to work with a licensed contractor to help outline the cost of work and materials needed for the renovation loan. The New Way experts explain this process and how to get a quote or bid from a licensed contractor for the work you plan to do and line item expenses for materials.

Contractors and Renovation Loans

Before you super-handy DIYers out there get excited about doing the renovations yourself, you should note that you can’t be your own contractor with these loans. In the RENO loan process, your contractor is not just an essential part of getting your home renovations done right but also of obtaining the loan in the first place. You’ll have to find a licensed, professional, and financially stable contractor whose work you can count on.

Why financially stable? Renovation loans pay out only when certain milestones are hit, so the contractor has to go out of pocket during the initial phases of renovation. As our experts will tell you, finding the right contractor—one with a solid reputation, one you share mutual trust with, and one you know you can work with—is essential to both getting a RENO loan and making the most of it.

FHA 203(k) Loans for Your Home Project

We’ve been talking about home renovation loans in a general way, but a particular type of loan that’s popular here in California is the FHA 203(k) loan. It’s also called an FHA home renovation loan or FHA rehab loan, and it comes in a standard and a limited version—for large and small renovations, respectively. You can take advantage of whichever version best suits your needs as long as the home you plan to renovate is or will be your primary residence and the renovations will be completed within six months.

The limit of an FHA 203(k) loan in California is 110% of the estimated future value of the property, so you can obtain a pretty sizable amount with which to conduct major repairs, updates, or additions.

Renovating Your Home with the Right Loan

If you’re looking to buy a fixer-upper or a place you know you want to update, or even do some work on your current house, a renovation loan can help you. And whether you need a FHA 203(k) loan to do some little repairs or a bigger budget to make some major changes to your home, there’s a renovation loan out there that can help make your place perfect.

If you’d like to learn more about renovation loans and whether a renovation loan may be the right fit for your situation, click here to connect with the crew at New Way Mortgage.