What is a reno loan used for

what is a reno loan

Home renovation loans can help you get enough money to repair or renovate your house. But what exactly is a renovation loan? Learn how you can spend your renovation loan and what types of loans you can use. 

If you have a home, you may want to make a few structural or stylistic changes to suit your aesthetic preferences and lifestyle better. Or you may be looking to get a return on your investment if you are looking to sell. According to a report conducted by Today’s Homeowner, remodeling projects boost your return on investment (ROI) by 69% on average.1 

How Much Can I Get With Renovation Loans?

A home renovation loan is any type of loan that offers emergency funding for home renovations. Want to replace your kitchen countertop, install new windows, or extend your living room? A renovation loan can help you afford the high cost! 

Home renovations typically cost thousands of dollars, so you likely need a sizable loan to afford the cost of labor, tools, and supplies. Home improvement projects generally cost more if you hire a general contractor versus doing the renovations yourself. However, there are instances when hiring an expert is the best course of action to avoid damage, injury, or improper installation. 

The amount of money you can get with a renovation loan depends on the lender, your credit background, and your credit score. Individuals with lower credit scores may find getting money for home improvements challenging. Most financial institutions offer high-interest rates and low loan amounts to borrowers that pose a financial risk. But there are ways to secure more money with a low credit score, so rest easy! 

How Much Money Do I Need From a Home Renovation Loan? 

Before you dive into learning about options for home improvement loans, it will be essential to know exactly how much money you will need from whatever home renovation loan you decide to choose. 

Home­buy­ers that par­tic­i­pat­ed in home improve­ment projects with­in the first year of purchase spent a medi­an of $6,000 doing so.2 The cost of renovating or repairing your home varies depending on the types of home improvements you want to make. 

If you want to know how much money you may need to remodel your home, take a look at some standard renovation options below.  

Home Improvement ProjectAverage Cost3Additional Cost for Contractor3
Adding an Addition to Your Home$46,750$4,700 to $9,400
Bathroom Remodel$11,150$1,100 to $2,200
Kitchen Remodel$25,850$2,600 to $5,200
Building a Deck$7,750$775 to $1,500
Building a Garage$27,500$2,750 to $5,500

Below is more information on each type of home project:

Adding an Addition to Your Home

Adding an addition to your home can mean several things. Homeowners can choose to make rooms bigger, add rooms, or create an entirely new floor by building up. Home additions are a significant project, so the cost is going to be relatively high. If you want to add an addition to your beloved house, the average cost is about $46,750. Hiring a general contractor will typically cost an additional $4,700 to $9,400.  

Remodeling Rooms in Your Home

Remodeling a room in your house can add space, alter the style, and change the layout for the better. The cost of a room remodel depends on the function and how you want to reconfigure it. Bathroom and kitchen remodels are some of the most common home improvement projects, as they can increase the property’s market value. The average cost of a bathroom remodel is $11,150, plus $1,100 to $2,200 to hire a contractor. Kitchen remodels cost roughly $25,850 on average, with an additional cost of $2,600 to $5,200 for a contractor.   

Building a Deck

A deck is a beautiful home addition that gives you extra livable space to entertain or relax. Plus, a deck can significantly increase the resale value of your property. The average cost to build a deck is $7,750. Hiring a general contractor may require an extra $775 to $1,500.

Building a Garage

Your garage is a vital storage room that protects vehicles and other valuables. But you can use a garage for practically any purpose, such as an exercise room. Renovating a garage can add extra space and better protection against water and debris damage. The average cost of building a new garage is roughly $27,500, with an additional $2,750 to $5,500 to work with a contractor.   

Home Improvement Loans To Build Your Dream Home

There are various loan options available if you need a renovation loan. The best choice for you depends on your desired loan amount, preferred repayment terms, affordable monthly payment, and credit background. Read about some of the various renovation loans you can apply for. 

Refinance Your Existing Mortgage Loan for Home Improvements

If you already have a traditional mortgage loan, know that you can refinance to get the money necessary for home renovations. You can use your home equity as leverage to get a cash-out refinance loan. A cash-out refinance allows homeowners to take out a larger mortgage loan and receive the difference in a lump sum to pay for renovations. 

The downside of a cash-out refinance is that you will end up owing more money, and you will once again have to pay closing costs (you will learn more about closing costs below). Your tax liability may also increase, so ensure you speak with an accountant to determine if refinancing is the best loan option. If you need to fix your credit score because it has gone down since you obtained the mortgage, know that you may not qualify for a refinance.

Apply for a Home Equity Loan

A traditional home equity loan is essentially a second mortgage loan. Homeowners can use the equity in their homes as collateral to get a renovation loan. The loan amounts are relatively high for home equity loans. Still, the amount you are eligible to receive depends on your existing equity, credit score, and income. 

Home equity loans can help you afford expensive home renovations. Getting a substantial loan can be challenging with a bad credit score. But while there are guaranteed home equity loans for bad credit, you could pay interest for years and a lot of it. If you get a home equity loan offer, keep in mind that you need to cover closing costs. You also risk losing your home in the event of unforeseen financial difficulties. 

Use a Home Equity Line of Credit (HELOC)

A home equity line of credit (HELOC) allows homeowners to use their equity as collateral to get money for renovations. You can borrow smaller amounts than a traditional home equity loan to avoid borrowing more than you need. The interest rate is typically variable, so there is some financial risk. Some monthly payments may be higher than others, so you could end up missing a payment due to increased payments. However, you only pay interest on the amount you borrow, not the credit line. In addition, you risk losing your house if you default. 

Get a Secured or Unsecured Personal Loan for Your Home Renovation Project

Personal loans offer large lump sums of money that borrowers can use for home renovations and other expenses. Personal loans are some of the most versatile lending options available and can come with different loan amounts, variable or fixed interest rates, varying monthly payments, and be used for all kinds of home-related uses. However, borrowers typically receive a fixed interest rate and monthly payment. 

Many people use personal loan options for home renovations and repairs. Unsecured personal loans are the most common; however, to qualify for this kind of personal loan funding, you will likely need to have a good credit score and the ability to prove that you can make your monthly loan payments. 

The good news is that getting a personal loan with bad credit may be possible, as there are bad credit loan options even for personal loans. You can still get a sizable unsecured loan if you have bad credit. Interest rates are generally decent, and you can get an extended repayment length to avoid high monthly payments. 

Lenders offer online quick cash loans you can start spending in as little as one business day. Personal loan qualification depends on a person’s credit score and income. 

Use an FHA 203(k) Loan for Home Improvement

An FHA 203(k) loan is a type of government loan that borrowers can use to buy or renovate a home. While similar to the Fannie Mae HomeStyle loan, an FHA 203(k) loan is backed by the Federal Housing Administration (FHA) and offers more flexible qualification requirements. You could be eligible despite a low credit score and a small down payment. However, government loans require private mortgage insurance, and the application process can take a lot of time.  

How To Increase Chances of Renovation Loan Approval?

If you have a low credit score, you may worry about your chances of qualification for home improvement loans. However, there are steps you can take to improve your eligibility status, even if most home renovation loans may ask for fair credit. Just because you have low credit doesn’t mean you have to forgo renovating your home.

Applying With a Co-signer

Applying with a co-signer can help you secure home improvement loans. If your co-signer has an excellent credit history, you can lower the lending risk of your application. Using a second party can increase your chances of approval and help you get lower interest rates.

Using Collateral 

Using collateral to secure a loan can also increase your chances of getting approval for a renovation loan. However, using collateral is risky because an unforeseen financial event can occur, and you may fall behind on monthly payments. Many home improvement loans use your home equity as collateral, which means you have to risk losing your home to get money for renovations. Consider your preferred level of financial risk and if you are willing to put your house on the line. 

Borrowing Money Through Bad Credit Loan Options

There are also renovation loan options specifically for individuals with lower FICO scores. If you have a bad credit score, you can search for bad credit loans, such as low-interest personal loan options for bad credit. There are financial options for just about anyone, so take the time to compare home improvement loans.  

FAQs on Home improvement loans

What types of renovation loan options are available for home renovations?

There’s a variety of renovation loan options, such as the FHA 203(k) loan from the Federal Housing Administration, Fannie Mae HomeStyle loan options, personal loans, home equity loans, and cash-out refinance options. Each has its own requirements and advantages, so it’s crucial to compare them based on your home renovation project’s needs.

How do interest rates on home improvement loans compare to other types of loans?

Interest rates for renovation loans can vary widely. Typically, secured loans like home equity loans and home equity lines of credit (HELOCs) may have lower interest rates compared to unsecured personal loans. Factors such as your credit score, loan amount, and the lender’s policies also influence the interest rates.

What is the difference between a home equity loan and a home equity line of credit when financing home improvements?

A home equity loan provides you with a lump sum for your home improvement projects at a fixed interest rate. In contrast, a home equity line of credit offers variable interest rates and allows you to draw from a credit limit as needed, making it more flexible for ongoing home renovations.

Are there specific requirements, like a minimum credit score or debt-to-income ratio, for obtaining a home renovation loan?

Most renovation loans have specific eligibility criteria, including credit scores and debt-to-income ratios. For instance, FHA 203(k) loans, which are insured by the Federal Housing Administration, might have more lenient requirements compared to Fannie Mae HomeStyle Renovation loans. Always check with your lender for precise requirements.

Do all home renovation loans require a down payment?

Not all home renovation loans require a down payment. Personal loans and certain types of home equity loans might not require any down payment. However, loans like the FHA 203(k) might require a percentage of the purchase price as a down payment.

How does the repayment of renovation loans work, especially concerning monthly payments?

Repayment terms differ among renovation loan options. Home equity loans might have a set monthly payment based on a fixed interest rate, while cash-out refinance options could adjust your existing mortgage terms. It’s essential to understand your monthly payments and loan terms before taking out the loan.

Can renovation loans cover both minor and major home improvement projects?

Yes, renovation loans can cater to a range of home improvement needs, from minor updates to major overhauls. The loan amount you’re approved for, whether it’s through personal loans, home equity loans, or other types, will determine the scale of projects you can undertake.

Is there a minimum or maximum loan amount I can borrow with a renovation loan?

The loan amount you can borrow varies depending on the type of renovation loan and the lender’s policies. Some might have a minimum or maximum limit, while others are based on your home equity or creditworthiness. Always check with your lender for specific amounts.

How long is the typical loan term for repaying a renovation loan?

Repayment terms can vary based on the type of loan and the lender. Personal loans might have terms ranging from 12 months to 10 years, while home equity loans might offer longer loan terms. It’s crucial to understand the repayment period before finalizing the loan.

Can I use multiple types of renovation financing options simultaneously?

It’s possible to utilize more than one financing option for your renovation, depending on your financial situation and the total cost of the project. For example, you might use a personal loan for immediate repairs and a HELOC for ongoing projects. However, managing multiple loans requires careful financial planning.

Is mortgage insurance or private mortgage insurance required with certain renovation loans?

Some renovation loans, like the FHA 203(k), may require a mortgage insurance premium or private mortgage insurance. These insurance types protect the lender in case you default on loan payments. The need for such insurance often depends on your down payment amount and loan type.

How do closing costs factor into home equity loans and home equity lines of credit (HELOCs)?

When obtaining a home equity loan or a home equity line of credit, you may encounter closing costs, similar to when you first purchased your home, which would base the closing costs on the purchase price. These costs can include application fees, appraisal fees, and attorney fees, among others. The amount varies depending on the lender and the size of the loan or credit line. Before finalizing either option, it’s essential to ask your lender about all associated closing costs and factor these into your decision.

The Bottom Line With CreditNinja

You can use different types of renovation loans to repair or modify your home. Renovations require a lot of money, but financing options are available to help you build your dream home. 

A renovation loan can help you complete minor or large-scale projects. Home additions and outdoor areas are the most costly renovation options, as they are major construction projects. 

The cost of room remodels can also be relatively high, but the price depends on the labor, materials, and supplies. If you need a sizable renovation loan to afford renovation costs, know that your options are vast! At CredItNinja, we want to help you learn more about the options out there so you can make an informed decision! 


  1. Home Renovation Facts and Statistics (2023) | Architectural Digest
  2. 4 Trends in Home Buying and Renovations From 2022 | HIRI
  3. How Much Do General Contractors Charge? | HomeAdvisor
  4. 203(K) Rehab Mortgage Insurance | U.S. Department of Housing and Urban Development

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