Two mortgages that may pay for your home improvements

Everyone wants to move into the perfect house. In reality, your dream home may not be a finished product when you buy it. While many mortgages won’t pay for improvements above the value of the existing home, here are two loan products that will.

Energy Efficient Mortgage (EEM)

EEMs are often used for newly built homes with energy-efficient features. However, a type of EEM called an Energy Improvement Mortgage (EIM) allows buyers to pay for an existing home and energy-efficient improvements in one loan. You can borrow money over and above the value of the property without increasing the size of the down payment. A qualified energy auditor must provide a rating that alerts the lender to how much difference the proposed improvements should make. This rating determines the cost of the loan, and EIMs can be insured by the Federal Housing Administration.

Federal Housing Administration 203k loan

EIMs may work if you’re replacing drafty windows and ancient HVAC systems but not for kitchen renovation or other updates not tied to energy efficiency. A 203k loan allows you to borrow the funds for many more types of renovation costs than EIMs as part of your mortgage—one loan, one closing. The amount you borrow is the sum of the home’s price and the estimated price of the repairs. A streamlined 203k is a good option if your improvements total up to $35,000 more than the purchase price. If $35,000 isn’t enough, the standard 203k lets you complete bigger projects.

Neither program will cover “luxury” improvements—a new hot tub won’t pass muster for an EIM or 203k loan. However, if you’re interested in a great home but worried about paying for needed improvements, these mortgage products can make your dream home a reality.