Considering Selling? Get a Home Renovation Refinance Instead

If you’re thinking about selling your home, you might want to reconsider. You could be about to throw away 10% or more of its value without even realizing it.

We’ll go over the actual costs of selling and moving and why it may make more sense to renovate your current home with a rehab refinance loan instead. 

The Costs of Selling Your Home

Renovating your home may sound intimidating, but then again, so can the costs associated with selling. 

It’s not uncommon for sellers to spend 9% to 10% of their home’s sales price on expenses such as:

• Broker commissions
• Transfer taxes
• Title insurance
• Contract concessions

For instance, if you’re selling a $500,000 property, the price tag to sell could be upwards of $50,000.

Plus, that estimate doesn’t include the other associated costs, such as preparing your home for listing, moving your belongings to your new property, and closing costs for the new mortgage.

And that’s all just the tangible costs of selling. It could also be challenging to find a suitable home in the current market, and you may wind up needing to do work on whatever property you purchase anyway.

Instead of paying all this money and going through the hassle of moving, renovating and reinvesting the funds into your home’s equity may make more sense.

Highlights

• Selling a home can cost you 9% to 10% of the sales price in fees and commissions, potentially totaling tens of thousands of dollars.
• A rehab refinance loan allows you to renovate your current home, borrowing against its future value, often at a lower cost than selling and buying a new property.
• Conventional, FHA, and VA rehab refinance options each offer unique benefits, with some allowing you to finance up to 100% of your home’s projected value.
• Consider alternatives like a HELOC or a cash-out refinance, especially if you have significant equity or want to handle renovations yourself.

The Costs of Renovation Refinances

Although not as costly as selling, refinancing to renovate your home still comes with costs – specifically closing costs.

But to be fair, if you were to sell your home and purchase something else, you would also have to pay closing costs on that new loan.

So, how much do closing costs on a rehab refi loan cost? It depends on the type of loan you’re applying for, but conventional mortgages typically have closing costs between 2% and 4% of the total balance.

Other types of loans may come with additional fees. FHA loans, for example, have an upfront mortgage insurance premium of 1.75%. Similarly, most VA rehab refinances have a funding fee of 2.15% or 3.3%.

It’s worth mentioning that refinancing could raise your interest costs if you currently have a below-market rate. However, selling your property and taking out a new purchase loan will likely leave you in the same situation.

However, one intangible cost of renovating is that depending on the scope and scale of your rehab, you may be displaced from your home for an extended period while the work is being completed.

Why Use a Rehab Refinance Loan?

Rehab refinance loans are ideal for making renovations and home improvements without paying out-of-pocket for the costs or needing a substantial amount of built-up equity in your home.

What makes these renovation refinances unique is that they let you borrow funds based on your home’s future “as-completed” value. This means that an appraiser will estimate how much your home will be worth when all of your planned renovations are complete, and the lender will use that figure for their calculations.

By contrast, other refinance options are based solely on your property’s current appraised value.

Plus, conventional rehab refi loans allow you to borrow up to 97% of the as-completed value. Other renovation refi options may let you borrow even more.

For Example: You currently have a $200,000 loan balance on your home, which is valued at $300,000. If you were to do a conventional cash-out refinance, you could borrow up to 80% of your home’s value – $240,000. This allows you to cash out up to $40,000 (minus closing costs) for renovations.

Your planned improvements will bring your home’s value up to $400,000. With a 97% LTV rehab loan, you could borrow up to $388,000. Paying off your existing $200,000 loan would leave as much as $188,000 (minus closing costs) available for renovations.

	Cash-Out Refi	Rehab Refi
Value Basis	$300,000	$400,000
Max LTV	80%	97%
Max Loan	$240,000	$388,000
Existing Loan Payoff	$200,000	$200,000
Proceeds (Less Closing Costs)	$40,000	$188,000

Rehab Refinance Options

The conventional HomeStyle Renovation and CHOICERenovation programs are the most common rehab refinance loans. However, both the FHA and VA offer government-backed rehab refis that could be better suited for certain borrowers.

We’ll also go over a couple of alternative options, such as opening a HELOC or simply doing a cash-out refinance.

HomeStyle Renovation and CHOICERenovation Conventional Loans

Conventional rehab refinance options include Fannie Mae’s HomeStyle Renovation and Freddie Mac’s CHOICERenovation loans. Both programs are similar, with many lenders offering one or the other depending on which agency they work with.

Homeowners with a credit score of at least 620 can finance up to 97% of their property’s as-completed value. Borrowing costs are likely lower with either option than with the FHA-backed alternative for most well-qualified borrowers.

Plus, if you plan to complete some of the project yourself, the HomeStyle Renovation loan permits you to do work representing as much as 10% of the property’s total value. For example, if your home’s as-completed value is estimated at $300,000, you could do up to $30,000 of work on your own. 

• Required Credit Score: 620
• Maximum DTI: 45%
• Maximum LTV: 97%

FHA 203(k) Loans

The FHA 203(k) loan is a government-backed rehab refi aimed at borrowers who may otherwise have trouble qualifying for a mortgage. 

You can get a 203(k) refi with a score of just 500, although you will be limited to a maximum LTV of 90%. Applicants with a credit score of 580 or higher are eligible to finance up to 97.75% of their home’s estimated future value.

Homeowners planning smaller improvement projects may want to consider the FHA’s Limited 203(k) refi, which allows you to finance up to $35,000 of renovations. However, starting in November 2024, FHA will allow renovations up to $75,000 for its limited 203(k) program.

• Required Credit Score: 500-580
• Maximum DTI: 50%
• Maximum LTV: 97.75%

VA Rehab Loans

VA rehab loans are a special type of cash-out refinance backed by the Department of Veterans Affairs. To be eligible, you typically need to be an active-duty service member or honorably discharged veteran. 

Qualifications and costs will be similar to those of the program’s cash-out refi but with the VA renovation loan being based on your property’s as-completed value, similar to the other rehab refis we’ve discussed.

As with a VA purchase loan, a VA rehab refi allows you to borrow up to 100% of your home’s anticipated value. Because the US government insures these mortgages, costs are often lower than with conventional rehab options.

• Required Credit Score: 580-620
• Maximum DTI: 41%-50%
• Maximum LTV: 100%

Home Equity Lines of Credit (HELOCs)

A home equity line of credit is a type of second mortgage that lets you make multiple withdrawals against your home’s equity over a period typically ranging from five to ten years.

This can make a HELOC a good choice for renovations that will span an extended timeframe or for which you aren’t entirely sure what the total costs will be.

The biggest reason to get a HELOC? Since it’s a second mortgage, you will not need to refinance your existing loan. This can greatly benefit homeowners currently locked into super-low interest rates on their primary mortgage.

Be aware, however, that HELOCs typically have higher rates than the other rehab options we’ve covered. If you have a small loan balance and are planning to borrow a relatively large amount for renovations, considering a rehab refi may still make sense.

Cash-Out Refinance Loans

We’ve already talked about how rehab refinance loans can let you borrow more (a lot more in some situations) than with a cash-out refinance, but sometimes the latter still makes more sense.

When might you opt for a cash-out refi instead of a rehab loan? 

• When you have plenty of existing equity
• When you want to complete the work yourself
• When you want to handle the payments to contractors and suppliers
• When you have cash on hand and plan to reimburse yourself afterward

So, what are your cash-out refinance options? Here are the three most popular.

Conventional Cash-Out Refinance

Conventional cash-out refinances are available to borrowers with a credit score of 620 or higher and allow you to cash out up to 80% of your home’s value. Well-qualified and higher-score borrowers are likely to get the best rates with a conventional refi, except for when they’re also eligible for a VA loan.

• Required Credit Score: 620
• Maximum DTI: 45%
• Maximum LTV: 80%

FHA Cash-Out Refinance

FHA cash-out refinances are great for borrowers with lower credit scores. Guidelines allow for a score as low as 500, although individual lenders may have their own requirements. 

Still, borrowers with bad credit will likely find FHA cash-outs cheaper and easier to qualify for than a conventional mortgage. The FHA limits cash-out refis to 80% of your home’s current value.

• Required Credit Score: 500
• Maximum DTI: 50%
• Maximum LTV: 80%

VA Cash-Out Refinance

Available to most current and past service members, the VA cash-out refinance lets you borrow up to 100% of your home’s current appraised value. VA guidelines set no credit score requirements, although you can plan to encounter lender minimums ranging from 580 to 620.

Overall costs for VA loans can be cheaper than conventional options in many cases.

• Required Credit Score: 580-620
• Maximum DTI: 41%-50%
• Maximum LTV: 100%

Don’t Sell Your Home Without Considering a Rehab Refinance

Selling your home can be both costly and stressful, especially when you take into account buying and moving into somewhere new. Instead, taking out a rehab refinance loan and updating your current property may be more practical and affordable.

To find out how much of a renovation loan you could qualify for and what other options you may have, take a look at the current refi rates and apply with a reputable lender today.