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March 13, 2024

What is the Difference Between a Renovation Loan and a Construction Loan?

Is your dream home waiting to be brought to life? Whether you're picturing a stunning kitchen remodel or a brand new house built from the ground up, this guide will help you navigate the world of renovation loans and construction loans to find the perfect financing option for your project.

This blog is for educational purposes only, not an offer of credit or advertisement for current loan terms. It does not provide legal advice. Refer to our loan web pages or consult professional advisors for specific information.

Dreaming of transforming a space into your ideal home, but unsure which loan option is right for you? Renovation loans and construction loans cater to distinct needs, and navigating their differences can be crucial for making an informed decision.

This article sheds light on the key distinctions between these loan types, helping you determine the perfect fit for your homeownership aspirations.

Start your application with MIDFLORIDA Credit Union.

What is the difference between a renovation loan and a construction loan?

The main differences between a renovation loan and a construction loan lie in the nature and scope of the projects they finance.

Let’s break down these differences.

Renovation loan

Renovation mortgages are essentially a home purchase and construction loan rolled into one.

They are structured based on the following:

  • Project type: Designed for existing homes that need upgrades or improvements, such as remodeling a kitchen or adding a bathroom
  • Project scope: Limited to existing structures, with projects ranging from cosmetic changes to more extensive structural modifications
  • Financing structure: Generally involves a combination of the purchase price and renovation costs, and is based on the estimated value of the renovated property
  • Approval process: Includes an evaluation of the existing value of the property, the scope and cost of renovations, and the borrower’s credit history and financial situation

Renovation loans allow borrowers to purchase a home and borrow additional funds to refurbish the house right after closing.

MIDFLORIDA’s Renovation Mortgage web page provides information on currently available terms.

The funds are bundled into your mortgage so you only have one monthly payment.

Construction loan

Construction loans, on the other hand, are designed to help you build your dream home from the ground up.

They are structured based on the following:

  • Project type: Involves the creation of a new structure from the ground up
  • Project scope: May include  the purchase of a residential plot of land and all construction costs
  • Financing structure: Based on the estimated costs of construction, including land acquisition and building expenses
  • Approval process: Requires detailed construction plans and cost estimates, and is based on the viability of the new construction project and the borrower’s creditworthiness

MIDFLORIDA’s Construction-to-Permanent Home Loan covers the financing during the building process and then transitions into a permanent loan once home construction is complete.

This saves borrowers the additional time and closing costs of two separate loans.

When should you use a construction loan vs. a renovation loan?

To determine whether a construction loan or renovation loan is right for you, consider whether you want to purchase an existing building or intend to start from scratch.

Even if the home you want to purchase needs significant repairs, it’s not necessarily a construction loan project unless you are starting from the ground up.

Construction loans cover the following costs:

  • Land acquisition if not already owned
  • Materials
  • Labor
  • Equipment
  • Contractor fees
  • Architectural and engineering fees
  • Permit fees

Renovation Mortgage covers the following costs:

  • Home purchase if not already owned
  • Fixtures
  • Appliances
  • New flooring
  • Paint
  • Roof repairs
  • Foundation work

Remember, while extensive renovations might be needed, a construction loan is typically only necessary if you're building a home from the ground up, acquiring land included. Conversely, renovation loans are suitable for existing structures even if significant repairs are required.

What are renovation loan and construction loan rates?

Interest rates for renovation loans and construction loans generally are similar to or slightly higher than traditional mortgage rates.

Rates vary depending on several factors, including the borrower’s creditworthiness, the lender’s policies, the loan amount, and the loan terms.

It also depends on whether you opt for an adjustable-rate mortgage (ARM) or a fixed-rate mortgage.

Generally, excellent credit scores will unlock access to lower mortgage rates.

How to get a renovation or construction loan in Florida

Renovation and construction loans are available for eligible Florida borrowers—with the right lender.

Let’s take a look at the steps involved in getting a mortgage to purchase and renovate an existing property or to purchase a residential lot and build a home from the ground up.

Step 1: Define your project

Do you want to purchase a plot of land and build a home, or would you prefer to find a home that needs some work and refurbish it?

This key distinction will determine your project needs and help you define your scope, budget, and timeline.

Step 2: Determine your eligibility

Next, evaluate your credit history and your finances.

Do you have steady employment and income? Do you have a strong credit score?

Your credit, income, and debts provide a picture of your financial health.

Renovation Mortgages and Construction-to-Permanent Home Loans require an excellent credit score.

Step 3: Find a lender

With a solid project plan and financial foundation in place, it's time to find the right lending partner. Seek out a lender with expertise in construction and renovation loans within your state. Pre-approval is an essential step, providing you with an estimated loan amount and demonstrating your financial commitment to potential contractors and sellers.

MIDFLORIDA is proud to serve Florida residents with a variety of construction and renovation loan options. We can help you navigate the financing process and find the right loan solution for your homeownership dreams.

Step 4: Get approved

Your lender will work closely with you throughout the loan approval process, ensuring you choose the ideal loan program that aligns with your project scope and budget.

Expect to provide:

  • Financial documentation: Proof of income, assets, and debt.
  • Detailed project plan: A comprehensive outline of your renovation or construction project, including timelines, materials, and estimated costs.

Once you submit your formal loan application, your lender will thoroughly review your documents and project plan to make a final decision.

Step 5: Close on your loan

Once approved, you can close on your loan and receive your funds!

Can you combine  a construction loan with  your mortgage?

MIDFLORIDA’s Construction-to-Permanent Home Loan and Renovation Mortgage products allow borrowers to include construction loans with a purchase mortgage in a few different ways.

With a Construction-to-Permanent Home Loan, borrowers can purchase a residential lot, secure the funds to build their home, and then transition seamlessly into a permanent loan once construction is complete.

A Renovation Mortgage allows borrowers to combine a home purchase mortgage with a construction loan.

This loan includes the purchase funds and the additional funds to renovate the home.

Both options provide borrowers with unique and flexible financing options to accomplish their homeownership goals.

Discover your loan options with MIDFLORIDA

Now that you know the difference between renovation and construction loans, you can move ahead in your home plans with confidence.

Start your application with MIDFLORIDA and we will reach out with your personalized loan options.


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