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Construction
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FirstTimeFlipper

I bought a fixer-upper cash and want to gut-renovate the kitchen, two baths, and add a 600 sq ft addition. Is this a construction loan or a renovation loan?

Answer from Jon Howard (HCP): What you are describing is a renovation loan, not a ground-up construction loan. Construction loans fund building from dirt or demolition to certificate of occupancy. Renovation loans fund improvements to an existing livable structure. For your project (interior gut + modest addition, staying in the footprint of the existing home), renovation is the right bucket and the rates are meaningfully better.

Your best options are: (1) FHA 203(k) Full if the scope is $75k-$500k and you want low down payment (3.5%), (2) Fannie Mae HomeStyle if you have 5-20% down and want conventional pricing, (3) a dedicated cash-out renovation product if you already own the home free and clear. Since you bought cash, option 3 is usually the cleanest — we refinance off the improved (after-repair) value, pull out your original purchase cash, and fund the renovation all in one close.

You will need: licensed GC, detailed bid and scope of work, draw schedule (typically 4-6 draws), and an as-completed appraisal. Budget 45-60 days to close. Ground-up construction loans are a different animal — 12-month interest-only during build, converting to permanent, higher rate, more draws, contingency reserves required. Save that conversation for the day you tear it down to the foundation.

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Jon Howard
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What you are describing is a renovation loan, not a ground-up construction loan. Here is the cleanest way to think about it:

  • Construction loan — raw land or a tear-down, building from foundation up. Typically a separate short-term loan that converts (or refinances) into a permanent mortgage at completion. Our OTC (One-Time-Close) product bundles both in one loan.
  • Renovation loan — existing structure, remodel / addition / system replacement. Financed as part of a purchase or refinance using the after-renovation value (ARV). Common products: FHA 203(k), Fannie HomeStyle, or our in-house Renovation Plus.

Your scope — kitchen, two baths, 600 sq ft addition — is classic Fannie HomeStyle or 203(k) Full (the "standard" 203k, not Limited, because structural addition triggers it). Since you already own the property free and clear, you would do a cash-out refinance with renovation, where we lend against the ARV and escrow the construction funds for a draw schedule just like a construction loan.

Practical next step: Get a licensed contractor's written bid with line-item pricing (not a verbal). An ARV-based renovation loan lives or dies on the contractor's scope doc and the appraiser's subject-to-completion valuation.

Happy to run your specific numbers — call 970-457-9107 or email jon@homesteadcapitalpartners.com.

NMLS #2587985 · Licensed Colorado · For educational purposes — not a commitment to lend.

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Denise W.
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Going through this exact decision right now on a property I inherited from my dad. Was calling the lender asking for a "construction loan" and they redirected me — what I actually need is a renovation loan based on the after-reno value. Your post clarified it. Starting the GC interviews this week and I'm making sure every bid comes back with line-item scope, not a one-page verbal. Thank you for posting this.

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Jordan Park
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Ran the numbers on construction-vs-renovation loan product mix using Fannie's 2024 delivery data as part of a class project. Renovation loans (HomeStyle + 203k) are under 2% of Fannie's purchase volume even though the housing stock is aging fast — huge underserved segment. The draw-schedule and after-renovation-value mechanics Jon describes are unfamiliar to most homebuyers, which is probably why the product under-penetrates. Worth flagging: the 203k Full requires a HUD consultant for scopes over $35k, which adds 3-5 days to the timeline on first-time files.

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DSCRdad_303
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I went through this exact decision last fall on a house I bought at auction in Pueblo. I thought I wanted a "construction loan" because I was gutting the whole thing, but my lender straightened me out — anything with an existing structure you're keeping is a renovation loan, even if 80% of the interior is coming out.

We ended up doing a Fannie HomeStyle because the scope was around $140k and I had 15% to put down (well, equity — I already owned it cash after the auction). The key thing Jon mentions that I underestimated: the after-renovation value appraisal. The appraiser has to value the property as if the work is already done, based on your contractor's detailed scope + the "as is" baseline. My first contractor sent in a one-page quote with no line items and it got rejected. Took me two weeks to find a GC who would produce a proper 6-page scope document.

Also be ready for the draw schedule piece — funds come out in stages, tied to inspections. Don't pick a contractor who needs big money up front. If they can't float the first phase, they're not capitalized enough for your project. Lesson learned the hard way.

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