Renovation Loans

• Renovation loans differ from similar types of debt like home equity loans. A home equity loan uses the potential value that a property has on the market, accounting for other debts attached to the property, as a basis for the debt. Lenders will only agree to lend up to a certain percentage of this value, which can severely limit the size of a loan for which an owner can qualify. A renovation loan, however, takes into account the value the property will have after the work is done, allowing owners to borrow even more.
  
  

Borrower Documentation

• Owners that try to apply for renovation loans will need to provide traditional loan information, including bank statements and income data, so that the lender can ascertain the owner's financial status. The owner will also need to file complete plans and specifications for the renovation itself, including all the details on when the renovation will take place, how much supplies and labor will cost, and who will be performing the renovation. If the owner is planning on doing the work personally, then the lender may also require proof of experience in construction or renovation.
  
  

Extra Requirements

• Other renovation loan requirements may change based on the situation. For instance, certain lenders may require a contract with a builder or company that states a fixed price for the work. For large projects, the loan may require a building permit and hazard insurance for the project. If major structures are being added, they may require more certification to meet local water, gas or septic standards.
  
  

Draw Process

• Many renovation loans involved something known as a draw process. Owners withdraw loan funds for each step of the renovation process as it starts. Lenders, in order to make sure the project is progressing, often require an inspector to visit the property and make sure that the last step has been fully completed before releasing the funds necessary for the next step.