Can You Finance Renovations with a Standard Jumbo Loan?
The short answer is no. A standard jumbo loan is designed to finance the purchase of a move-in ready home. The loan amount is based on the lesser of the agreed-upon purchase price or the home's current appraised value. Lenders providing these loans expect the property to be habitable and complete at the time of closing. They do not have a mechanism to fund future construction or hold and disburse money for renovations.
Attempting to use a standard jumbo loan and then paying for renovations out-of-pocket can be challenging for a few reasons:
- Cash Depletion: High-end renovations can cost hundreds of thousands of dollars. Paying for this in cash after making a substantial jumbo down payment can severely deplete your liquidity.
- Separate Financing: You could try to get a separate home equity line of credit (HELOC) or a personal loan after closing, but this is not guaranteed. It involves a second underwriting process, additional closing costs, and you may not qualify for the amount you need.
This is precisely the problem a jumbo renovation loan solves. It’s a specialized financial tool that combines the home purchase and the cost of renovations into one single loan with one closing and one monthly payment, all based on the home's future value.
How Does a Jumbo Renovation Loan Calculate Future Value?
This is the core concept that makes these loans so powerful. Instead of focusing on the home's current condition, the lender bases the loan amount on the After-Repair Value (ARV). The ARV is a professional appraiser's opinion of what the home will be worth after all your planned renovations are completed.
Here’s how the process works:
- Submit Plans: Along with your loan application, you submit detailed architectural plans, specifications, and a line-item bid from a qualified and lender-approved contractor.
- The ARV Appraisal: The lender hires an appraiser who is experienced in construction and renovation projects. The appraiser performs two valuations in one report:
- ‘As-Is’ Value: The value of the property in its current state.
- ‘Subject-to-Completion’ Value: The projected value of the home once the renovations described in the contractor's bid are finished. This is the ARV.
- Loan Calculation: The lender uses the ARV to determine your maximum loan amount and loan-to-value (LTV) ratio.
Example Scenario
- Purchase Price: $2,200,000
- Estimated Renovation Costs: $350,000
- Total Project Cost: $2,550,000
- Appraiser's Determined ARV: $2,900,000
The lender will base your LTV on the $2.9 million figure, allowing you to finance a significant portion of the $350,000 renovation cost as part of your primary mortgage.
What Types of Renovations Are Eligible for Financing?
Lenders want to finance renovations that permanently become part of the property and add measurable value. While specifics can vary between lenders, most eligible projects fall into these categories.
Typically Eligible Renovations:
- Complete kitchen and bathroom remodels
- Room additions, such as adding a master suite or expanding a family room
- Structural modifications and repairs, including foundation or roof replacement
- Finishing basements or attics to create habitable living space
- Major system overhauls (HVAC, electrical, plumbing)
- Energy efficiency upgrades like new windows and solar panels
- Significant landscaping, in-ground pools, and outdoor kitchens
Typically Ineligible Renovations:
- Projects considered luxury items not affixed to the home (e.g., furniture, tennis court nets, high-end electronics)
- Any work you plan to do yourself (DIY). Lenders require licensed and insured contractors to perform the work.
- Minor cosmetic updates that do not add significant value to the appraisal.
The data, information, or policy mentioned here may vary over time.
What Are the Down Payment Requirements?
The down payment for a jumbo renovation loan is calculated based on the total project cost, which is the purchase price plus the total cost of the renovations.
Expect down payment requirements to be between 15% and 25% for most programs, though some lenders may go lower or higher depending on the loan amount and borrower qualifications. The data, information, or policy mentioned here may vary over time.
Let’s revisit our example:
- Purchase Price: $2,200,000
- Renovation Costs: $350,000
- Total Project Cost: $2,550,000
If the lender requires a 20% down payment, your calculation would be:
- Required Down Payment: $2,550,000 x 0.20 = $510,000
- Total Loan Amount: $2,550,000 - $510,000 = $2,040,000
This structure allows you to purchase and fully renovate the property with a single, manageable down payment instead of needing $510,000 plus another $350,000 in cash for the remodel.
How Do I Find and Get a Contractor Approved?
Your choice of contractor is one of the most critical aspects of a successful jumbo renovation loan. The lender has a vested interest in your project's success and will conduct a thorough review of your chosen builder. The process isn't just about finding a good contractor; it's about finding one the lender trusts.
Finding a Qualified Contractor
Start by searching for general contractors who have extensive experience with large-scale luxury remodels and additions. They should be able to provide:
- A portfolio of similar projects.
- Client references.
- Proof of proper state licensing and insurance.
- A detailed, fixed-price bid that breaks down labor and materials line by line. Avoid vague estimates.
The Lender's Vetting Process
The lender needs to ensure the contractor is reputable, financially stable, and capable of completing the job on time and on budget. Be prepared for your contractor to submit a package for approval that includes:
- A completed contractor profile form.
- Copies of their state license, liability insurance, and worker's compensation insurance.
- A list of recent projects and professional references.
- Financial statements or a letter from their bank confirming their financial stability.
This approval process protects you from unqualified builders and gives the lender confidence that their investment is secure.
How Is Renovation Money Disbursed?
The renovation funds are not given to you or the contractor as a lump sum at closing. Instead, they are placed in an escrow account managed by the lender or a third-party fund control company. The money is paid out to your contractor in stages through a process called a draw schedule.
The draw schedule is agreed upon before your loan closes and aligns with major project milestones. Here is a typical workflow:
- Work Completion: The contractor completes a defined phase of the project, such as demolition and framing.
- Draw Request: The contractor submits a draw request to the lender for the funds associated with that completed phase.
- Inspection: The lender sends an inspector to the property to verify that the work has been completed according to the plans and building codes.
- Funds Released: Once the inspector approves the work, the lender releases the funds for that draw directly to the contractor.
This process repeats for each milestone (e.g., plumbing/electrical rough-in, drywall, finishes) until the project is 100% complete and a final inspection is passed.
Reserve Requirements Compared to a Standard Jumbo Loan
Post-closing reserves, or liquidity, are funds you must have left over after your down payment and closing costs are paid. All jumbo loans require significant reserves, but the requirements for a jumbo renovation loan are typically more stringent.
- Standard Jumbo Loan: Lenders often require 6 to 12 months of PITI (principal, interest, taxes, and insurance) payments in a verifiable liquid account.
- Jumbo Renovation Loan: Lenders may require 12 to 18 months of PITI. Furthermore, they will almost always require a contingency reserve. This is an additional amount, typically 10-20% of the total renovation budget, set aside to cover unexpected costs or project overruns. This contingency fund must be in place before the loan closes and provides a critical safety net.
The data, information, or policy mentioned here may vary over time.
Can I Use This Loan for a Luxury Kitchen Remodel in Orange County?
Yes, this is a perfect use case for a jumbo renovation loan. A high-end kitchen remodel is a project that adds significant value and is exactly the type of renovation these loans are designed to finance.
Let's walk through a specific scenario:
- Property: You find a home in Newport Beach for $2.8 million. It has great bones and a view, but the kitchen is from the 1990s.
- Project: Your contractor bids $225,000 for a complete luxury kitchen overhaul, including custom cabinetry, professional-grade appliances, and reconfiguring the layout.
- Total Project Cost: $2,800,000 (purchase) + $225,000 (reno) = $3,025,000.
- Financing: With a 25% down payment ($756,250), you can secure a single jumbo renovation loan for $2,268,750.
- Process: At closing, the seller is paid $2.8 million, and the remaining $225,000 is placed into the escrow account. Your approved contractor can then begin work and get paid through the draw process as they complete each stage of your new kitchen.
This streamlined approach allows you to buy the home you want and immediately begin transforming it into the home you love, all with the predictability of a single mortgage. A jumbo renovation loan is a complex product, but it can be the key to creating your perfect California home. To understand your specific options and navigate the process, consulting with a mortgage strategist who specializes in this niche financing is a crucial first step.
Ready to turn a potential house into your dream home? A jumbo renovation loan can make it happen. Begin your journey and Apply now to explore your personalized financing options.
Author Bio
David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping clients with unique financial situations, including those recovering from foreclosure or bankruptcy. He expertly crafts smart, strategic, and stress-free mortgages by leveraging a vast network of over 100 lenders to secure competitive rates for investors and homebuyers alike. Praised for exceptional customer service, David has helped hundreds of families with a 97% satisfaction rate, guiding them to the mortgage they deserve.
References
Consumer Financial Protection Bureau - What is a construction loan?
