For this video podcast, we sat down with renovation lending expert Vanessa Res to break down the real-world mechanics of financing a remodel or new construction project in Portland.
This article summarizes the key insights from that conversation, including:
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How renovation loans work
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When a HELOC or cash-out refinance makes sense
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What to know about FHA 203(k) loans
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How interest rates impact remodeling decisions
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And the common mistakes that derail projects
If you’re considering a major kitchen remodel, home addition, ADU, or ground-up build, the overview below expands on the most important financial takeaways from the interview so you can make informed, confident decisions about funding your project.
How to Finance a Remodel in Portland (Without Making Costly Mistakes)
If you’re planning a major remodel or custom build in Portland, you’re probably asking one big question: How do we pay for this the smart way?
With projects ranging from $80K to $500K, your financing choices determines what’s possible, when you start, and how much stress you experience along the way.
We recently sat down with renovation lending expert Vanessa Res to unpack how remodeling financing actually works, what derails projects, and how homeowners can avoid expensive missteps.
Most Homeowners Don’t Know Renovation Loans Exist
Many homeowners don’t realize renovation loans are even an option. Vanessa regularly hears clients say, “I wish I would’ve known about this 10 years ago!"
Instead, homeowners often:
- Live in a house that needs work for years
- Save slowly while construction costs inflate
- Remodel right before selling (and barely enjoy the upgrade)
A renovation loan allows you to:
- Buy a home and finance the remodel at the same time
- Or refinance and wrap renovation costs into a new loan
- Base your financing on the after-improved value (what the home will be worth once completed)
That last point is critical. It’s what makes renovation loans powerful.
How a Renovation Loan Works (Step-by-Step)
Here’s a simplified breakdown of the purchase + remodel scenario:
1. You Find a Home
You identify a property that needs updating.
2. Your Contractor Provides a Detailed Bid
This must be:
- Licensed & bonded
- Line-itemized
- Detailed enough for appraisal
- Inclusive of as many finishes as possible
3. The Appraiser Determines the "After-Improved Value"
The lender sends:
- Purchase agreement
- Scope of work
- Contractor bid
The appraiser estimates what the home will be worth after renovations are complete.
4. You Close on One Loan
- The purchase + renovation are wrapped together
- The lender holds renovation funds
- Contractor is paid in draws as work is completed
- Inspections verify progress
This structure protects everyone involved: homeowner, contractor, and lender.
Why Rates Have Reduced Renovation Loans (But Not Killed Them)
For homeowners who are lucky enough to have 2.5–3% mortgages, a renovation loan isn't a welcome option. That's because in order to use a renovation loan, they must refinance their first mortgage, losing that low interest rate. For most, that’s a non-starter.
Instead, many are choosing:
- Home Equity Loans
- HELOCs
- Or putting off the project for a future date
However, renovation loans still make strong sense when:
- You’re buying a new home
- You need more equity than a HELOC allows
- You want to base borrowing on after-improved value
Comparison: Renovation Loan vs. HELOC vs. Cash-Out Refinance vs. Home Equity Loan
Here's how the various loan options compare and which situations they may be best suited for.
Renovation Loan
- Based on after-improved value
- Single closing (if under conforming limits)
- Slightly higher rate (~0.25% for conforming)
- Includes 10% contingency
Best for:
- Major structural remodels
- Homes with permit issues
- Buyers who need to fix serious defects
- Projects beyond available equity
HELOC
- Variable rate (prime-based)
- Revolving credit line
- Usually capped at 80% of current value
Best for: Smaller or phased projects.
Cash-Out Refinance
- Replaces your existing mortgage
- New 30-year fixed rate
- Often lower rate than a second-position loan
Best for: Homeowners who don’t have ultra-low legacy rates.
Home Equity Loan
- Fixed rate
- Second lien behind existing mortgage
- Typically up to 80% of current value
- Lump sum
Best for: Homeowners with strong equity and a low first mortgage rate.
FHA 203(k): The “Credit-Challenged” Option
FHA 203(k) loans are designed for:
- Lower credit scores (as low as ~600)
- Recent bankruptcies or foreclosures
- Primary residences only
There are two versions of FHA 203(k) loans:
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Streamline 203(k)
- Under $75,000
- Non-structural work
- No HUD consultant required
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Full 203(k)
- Over $75,000 or structural
- Requires HUD consultant
- More oversight
One key lesson: Multiple contractors derail these loans.
Each contractor must fill out lender paperwork, and most subcontractors won’t do it for small scopes like replacing one window or another small job.
The solution to this is to use one general contractor who bundles everything.
What Happens If a Home Has Unpermitted Work?
Unpermitted additions or renovations are more common than most buyers realize: garage conversions, added bedrooms, second-story expansions, even structural changes done without inspections.
The good news is that you can still finance a home with unpermitted work. If the appraiser identifies work that was completed without permits, the lender will require that it be addressed as part of the transaction.
That typically means one of two things:
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The unpermitted work must be brought up to current code and properly permitted after closing.
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Any structural or safety issues must be corrected as part of the renovation scope.
Those correction costs can usually be rolled directly into a renovation loan. That includes engineering, rebuilding structural components, or even partially demolishing and reconstructing unsafe additions.
In some cases, discovering unpermitted or defective work creates leverage during negotiations. If the true cost to correct the issue is significant, the buyer may be able to renegotiate the purchase price to reflect the required repairs.
While this may sound intimidating, financing the corrections upfront is often the safest way to purchase a problematic property. Instead of guessing at repair costs or relying on informal contractor opinions, the renovation loan process forces accurate bids, formal scopes of work, and verified appraisals before the deal closes.
In other words, you solve the problem on paper (with real numbers) before you own it.
Should You Remodel or Move?
The question of remodeling a home or moving to a new one is a deeply personal question homeowners and families face. While your individual case will determine what's most important to you, there are creative approaches we’re seeing:
- Keep your low-rate home as a rental
- Buy new property + renovate
- Build ADU for multi-generational living
- Remodel now and refinance later
If the monthly payment works for your situation today, you can refinance later when rates drop.
When Paying Cash Makes Sense (And When It Doesn’t)
If you have liquid cash sitting in savings, it's often simplest to pay cash for renovation projects. But financing may make sense if:
- Assets are invested and illiquid
- Your returns exceed borrowing cost
- You want liquidity preserved
To help make your decision it's important to always compare the renovation rate vs. investment return.
What Separates Smooth Renovation Projects from Disasters?
From a lending perspective, successful projects share 4 traits:
1. Credit is Checked Early
Surprise late payments (even a forgotten utility bill from a previous address) can wreck approvals.
2. Contractor is Selected Before Offer
Waiting until under contract burns valuable time.
3. Team Communicates Together
Lender + Realtor + Contractor aligned early prevents chaos.
4. Everyone Understands the Payment
Many projects collapse because a co-borrower hears the monthly number too late.
What About Construction Loans?
For ground-up construction, the structure is a little different than a standard purchase or renovation loan.
With a construction loan, the borrower is given a rate cap during the build period. That means the interest rate cannot go higher than the capped rate while the home is under construction.
When the project is complete, the lender checks current market rates. If rates have improved, the borrower receives a free float-down to the lower rate. If rates are higher, the borrower keeps the original capped rate.
If the total loan amount stays within conforming limits, the project can typically close once with one set of closing costs. If the loan exceeds conforming limits, it usually becomes a two-time close, which means two sets of closing costs.
Construction loan rates are generally a bit higher than move-in-ready purchase rates (often about a half point higher) because financing a home that is still being built carries more risk for the lender.
The rate cap combined with the float-down feature gives borrowers protection during the construction process while still allowing them to benefit if rates improve before the home is finished.
Remodeling Costs Rise Every Year
In Portland, construction costs have consistently increased year-over-year. Waiting 3–5 years to “save up” may cost more than financing sooner.
If you know you want to stay in your home long-term:
- Early renovation can lock pricing
- Enjoy the improvements longer
- Avoid compounding inflation
Financing Should De-Risk Your Remodel
The right loan structure will make your remodel process less stressful and will provide confidence that your project is in good hands. The right financing reduces surprises along the way by forcing detailed pricing, ultimately protecting homeowners from underestimating true costs of the project.
The wrong approach is to close on a house with vague contractor estimates and hope it works out.
Major remodels are emotional decisions: kitchens where your kids grew up, ADUs for aging parents, homes where you’ll spend your retirement.
The right financing option will support your overall vision for your family and your lifestyle.
