You found a home with the layout and location you want, but it needs a new kitchen, roof, or more extensive repairs. A renovation mortgage may let you finance the purchase and eligible improvements together. What happens after you choose the contractor, and when does that contractor actually get paid?
The answer is more structured than a typical home improvement project paid from savings. A renovation loan usually requires a defined scope, acceptable bids, an appraisal based on the permitted loan structure, and a process for holding and disbursing renovation funds. Work, inspections, and draws continue after the home purchase closes.
The precise rules depend on whether you use an FHA 203(k), a conventional renovation product, or another loan. This guide explains the questions to settle with your contractor and mortgage team before making an offer or scheduling work.
Why the lender needs a detailed contractor bid
“New kitchen: $30,000” may be enough for an early conversation, but often not enough to underwrite a renovation mortgage. The lender needs to understand what is being repaired or improved, what materials and labor will cost, whether permits are required, and how the project will be completed.
Under Fannie Mae’s HomeStyle Renovation guidance, renovation costs are based on plans and specifications and the contractor’s bids for the requested work. The financed budget may also include an eligible contingency reserve and renovation-related costs. FHA 203(k) has its own requirements for work write-ups, contractors, consultants, and disbursements.
A useful bid should identify each task, the price, materials or allowances, the contractor’s information, the expected schedule, permit responsibility, and any work the homeowner expects to do separately. Ask the lender what format and approvals it requires before you assume a contractor’s standard proposal will be sufficient.
How does the renovation budget become part of the mortgage?
The purchase price is only one piece. The mortgage team estimates the eligible repair costs, program-related fees, and any required contingency. The appraiser may consider the property in its current condition and the proposed completed work according to the chosen program. The maximum loan amount and required cash are then calculated under that program’s rules.
This does not mean any project price can be rolled into any mortgage. The loan program may limit the type of improvements, renovation amount, loan-to-value calculation, property condition, timing, and who can perform the work. A conventional renovation option and an FHA 203(k) can produce different numbers for the same house.
The Thomas Faille Mortgage Team offers renovation home loan information and can help compare the applicable options. Ask for a written scenario using the actual property and contractor scope, including down payment, cash to close, mortgage insurance if applicable, and estimated monthly payment.
What is a contingency reserve?
Renovations can uncover hidden damage once walls or floors are opened. A contingency reserve is money set aside within the project budget for eligible unforeseen costs. The required amount and permitted uses depend on the loan program, property, and scope. It is a controlled part of the financing plan, not an unrestricted fund for later design upgrades.
For example, a contractor might discover deteriorated subflooring when replacing a bathroom. The borrower and contractor should document the issue, revised price, and proposed change, then ask the lender or renovation administrator how to approve it before work proceeds. Do not promise the contractor that the reserve can be released automatically.
If the contingency is not needed, the program and loan documents govern what happens to the unused funds. Ask this question at the start. The reserve’s presence does not mean you should omit known repairs from the original bid to keep the quote low.
What is a draw?
A draw is a release of renovation money from an account controlled under the loan program. At closing, the purchase transaction can be completed while some money intended for renovation work is held for later disbursement. The contractor is generally paid according to an approved schedule and evidence of progress, rather than receiving the full project budget on day one.
The contract, lender process, and loan type determine whether money can be advanced for materials, what inspection or documentation is required, who signs a draw request, and whether a final payment is held until completion. Fannie Mae’s consumer tips for HomeStyle Renovation advise borrowers to have a payment schedule acceptable to the borrower, contractor, and lender.
FHA’s draw policies can change. For example, a 2026 HUD update to Limited 203(k) draw requests expanded the maximum number of draws per contractor and clarified initial, intermediate, and final disbursements. That does not mean every FHA or conventional renovation loan follows the same draw schedule. Your lender should explain the current rules for the exact product.
What does a contractor need to know before agreeing?
Some contractors are comfortable waiting for draw payments; others price their work around a large upfront deposit. A mismatch can delay the mortgage or construction. Before signing the renovation contract, ask the lender what contractor screening, licenses, insurance, references, bid details, and project documents it needs. Then ask the contractor whether it can operate under the approved payment process.
Questions for the contractor include:
- Can you provide an itemized bid that meets the lender’s format?
- Are you willing to supply licensing, insurance, and other requested documents?
- Can you work with an escrowed draw schedule and inspection process?
- Who obtains permits and schedules municipal inspections?
- How will you price and document changes after work begins?
- What is the realistic start date and completion date?
- Which subcontractors will do the electrical, plumbing, roofing, or structural work?
Do not hire solely on the lowest number. A very low bid that omits necessary labor, materials, or permit costs may make the loan estimate look easier initially but create a funding gap later. Have the contractor walk the property and review the intended work before the financing figures are finalized.
Do I start renovations before the loan closes?
Usually, do not authorize work or incur project expenses expecting automatic reimbursement until your lender confirms how the chosen program handles them. Starting demolition or changing the property’s condition before appraisal and closing can complicate the lender’s review. A signed contract may also create obligations if the home purchase falls through.
Coordinate inspection access and bid preparation during due diligence, but ask the mortgage team when work can legally and practically begin under the loan agreement. If the seller is completing repairs instead, distinguish those repairs from the work the buyer plans to finance. The lender and appraiser need a consistent account of what will be done before closing and what will be done afterward.
What happens if the scope changes midway?
Renovation projects rarely proceed exactly as imagined. A hidden plumbing issue, permit requirement, or discontinued material may prompt a change order. The contractor should describe the revised work, cost, and schedule in writing. The borrower should get lender or renovation administrator approval when required before assuming the revised amount will be funded.
An approved change may use available contingency or require the borrower to contribute additional funds. A change that pushes the project beyond the program’s completion deadline can cause another problem. Keep the project team informed promptly, and retain signed approvals and receipts.
The same care applies to a contractor change. Do not dismiss one contractor and hire another without asking what the lender needs to approve the replacement and account for work already completed.
What happens after the last draw?
The lender or its representative may require a final inspection, proof that the contracted work was completed, permits or other approvals, and documents showing contractors or suppliers were paid. The process differs by program. For HomeStyle Renovation, Fannie Mae’s completion guidance requires a certification after renovation that the work was completed in accordance with the submitted plans and specifications.
Closeout is part of the mortgage process, even though the home purchase may have closed months earlier. Keep your contractor engaged through final documentation and do not treat the project as finished simply because the rooms are usable.
Build a timeline that includes the mortgage and the construction
Two schedules overlap: the purchase closing and the renovation. The purchase side can depend on an accepted offer, inspections, a detailed bid, contractor review, appraisal, underwriting, and final loan approval. The construction side can depend on permits, material lead times, inspections, draws, weather, and final completion.
If the home is uninhabitable during work, budget for temporary housing and ask whether the loan program permits any payment-related accommodation. For example, Fannie Mae’s HomeStyle cost guidance describes a limited option for certain mortgage payments during a principal residence renovation when the home cannot be occupied, subject to its rules. Do not assume this is available or enough to cover all carrying costs.
Maintain a cash cushion even when the renovation is financed. Your mortgage payment, utilities, insurance, taxes, temporary housing, and noncovered expenses may overlap. Use the team’s mortgage calculator for a starting payment estimate and ask for a project-specific closing and renovation budget.
Frequently asked questions
Does the contractor receive all the renovation money at closing?
Generally, renovation funds are controlled and disbursed under the loan’s escrow and draw process. The exact timing of deposits, materials advances, progress payments, and final payment depends on the product and lender.
Can I choose any contractor?
You can propose a contractor, but the lender and program may require qualifications, documentation, and acceptance of the draw and inspection process. Ask about requirements before signing a nonrefundable contract.
What if repairs cost more than the original bid?
Submit a documented change request. An eligible contingency reserve may help, but its use requires approval and may not cover every change. You may need more cash or a revised scope.
Can I do some of the work myself?
It depends on the loan program and lender, as well as your qualifications and the type of work. Tell the mortgage team early if you intend to perform labor yourself. Do not assume the loan will pay you for your time or accept an informal DIY estimate.
Does the appraisal use the home’s future value?
Renovation products can involve an appraisal that considers the completed improvements under program rules. The appraiser and lender use the plans, specifications, and approved scope. A hoped-for resale value or contractor’s estimate is not a guaranteed appraised value.
Bring the contractor into the financing conversation early
A renovation loan works best when the buyer, contractor, and mortgage team agree on the work, price, payment process, and timeline before closing. If you have a fixer-upper in mind, contact the Thomas Faille Mortgage Team with the property and preliminary renovation plan. The team can explain which loan programs may fit and what your contractor needs to provide.
