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Renovation loans—what are they? And when are they good to use? Find out in today’s video.

You’ve found the home you want, but it’s a little worse for wear, and it screams “grandma.” You think to yourself, “If only I had the money to buy it and fix it up.” The prospect might seem a little daunting, though; purchasing a home and subsequently using more cash for renovations comes at a high cost.

However, by using a renovation loan, your lender will give you some budget room for renovation expenses you’ll incur, and that piece of financing will be wrapped into the full loan.

One of the more popular options for a loan of this type is the 203(k) loan. Here, if the home you’re purchasing is valued at $400,000, but is in need of $35,000 worth of repairs, your lender will write the loan for $435,000.

“Buyers who fall somewhere in the middle have the opportunity to buy the home, put the “sweat equity” into it, and reap the benefits on the back end.”

Who is (and isn't) a good candidate for this loan product? These homes aren’t at a price point that is a major draw for investors, and they’re not yet in the condition that would-be buyers who want a finished product are looking for.

Buyers who fall somewhere in the middle have the opportunity to buy the home, put the “sweat equity” into it, and reap the benefits on the back end.

Those are the upsides of purchasing a home with a renovation loan. Now, for the downsides: While it’s being renovated, you’ll still have to make payments on the home. Also, your lender will require you to have reserves set aside in the bank, and they’ll need to last several months.

It’s worth noting that these are high-interest loan products as opposed to a traditional, residential loan.

While there are some cons to keep in mind with renovation loans, they come with a few meaningful advantages. If you have any further questions, please reach out to me. I’d be happy to help!