Each year, about 30 percent of homeowners start one or more home renovations, spending an average of about $9,500, according to the American Housing Survey (AHS). These investments in home improvements have helped keep the rate of housing obsolescence low in the US, but not every household living in an aging home has the cash to make adequate repairs.
In a new analysis of AHS data, we find that only a very small share of homeowners use renovation loans to finance home improvements, underscoring the limited access to these tools. This lack of available tools is especially limiting for households with lower incomes. Not only are they more likely to live in older and inadequate homes, but they are less likely to have the cash to spend on home renovations.
By making renovation financing more accessible, federal policymakers and agencies could help more households—especially those with lower incomes and who are cash constrained—make necessary improvements to their homes and preserve the existing housing stock.
Most homeowners use cash to finance renovations
Using the 2023 AHS, we analyzed how homeowners fund home renovations. We found that across all income levels, 77 percent of homeowners paid for renovations using cash from savings. Credit card debt was the second-largest source (6.4 percent of homeowners).
By contrast, only about 5.4 percent of homeowners across all income levels relied on cash-out refinancing and home equity loans and lines of credit. For households with incomes less than $50,000, only 2.4 percent used these options to renovate.
Renovation-specific loans—those based on the after-repair value of the property—are not separately identified in the AHS and are instead included in the “other” category, reflecting their limited use.
2024 Home Mortgage Disclosure Act (HMDA) data underscore this point. Home improvement loans accounted for less than 1 percent of total mortgage originations and had a notably high denial rate—44 percent overall—compared with denial rates below 15 percent for home purchase applications.
We also examined whether homeowners used different sources of funding for renovations costing more than $15,000. As expected, larger projects are somewhat less likely to be funded with cash or credit cards and are more likely to rely on cash-out refinances or home equity products. But the differences are modest, suggesting that cash reliance is higher even for high-cost projects. The share of homeowners using cash for large renovations dropped less than 5 percentage points overall, with the share using credit cards dropping about 1.5 percentage points. Those using cash-out refinances, home equity loans, and lines of credit to make large renovations was 9.9 percent, compared with just 5.4 percent among homeowners doing renovations of any size.
Still, even for larger projects, more than two-thirds of homeowners relied primarily on cash.
Homeowners with low incomes are more likely to live in older or substandard homes but are less likely to make repairs
Homeowners earning less than $50,000 occupy 30.7 percent of homes built before 1960 and 18.4 percent of homes built in 2000 and after. By contrast, homeowners earning $100,000 to $200,000 per year occupied 25.9 percent of homes built before 1960 and 35.2 percent of homes built in 2000 and after.
Households with lower incomes are also more likely to live in homes in substandard condition. Only 3.3 percent of owner-occupied homes in the 2023 AHS are classified as inadequate overall, but this share rises to 5.3 percent among households with incomes below $50,000. Just 2.2 percent of households earning $100,000 or more live in inadequate homes.
Though households with lower incomes are more likely to live in older homes in poorer condition, they are less likely to renovate. Fewer than 26 percent of homeowners with incomes below $50,000 renovated their homes in 2023, compared with more than one-third of homeowners with incomes above $200,000.
Moreover, renovation spending represents a smaller share of home value for households with lower incomes. Annual renovation spending equals about 0.7 percent of total home value for the lowest-income group, compared with 1.2 percent for the highest-income group.
HMDA data reveal unmet demand for renovation financing among households with lower incomes.
In 2024, more than 33 percent of applicants for home improvement loans had household incomes below $50,000, compared with fewer than 25 percent of applicants for home purchase loans. But only 27 percent of home improvement loan applications from households earning less than $50,000 were approved, showing that households with lower incomes face greater challenges accessing renovation financing.
Policy solutions
Our analyses show that households with lower incomes are less apt to renovate their home, lacking access to both cash and renovation financing. As the country’s housing stock rapidly ages, helping all households, including those with lower incomes, access renovation financing could help keep more homes in better condition in the long term.
To expand access to renovation financing, federal policymakers and agencies could do the following:
- Improve awareness of the Federal Housing Administration’s (FHA’s) 203(k) renovation program.
In 2024, the FHA made significant improvements to the 203(k) renovation program, which allows borrowers to combine a purchase or refinance loan with a home improvement loan in a single mortgage. This has made the program less burdensome for both borrowers and lenders. Most significantly, the FHA raised the threshold from $35,000 to $75,000 for the limited program type, which does not require a consultant from the US Department of Housing and Urban Development (HUD).
Despite the improvements, many lenders still don’t offer this program. HUD could increase lender participation by promoting the revised program. It could also expand the HUD consultant workforce, a role that’s become more appealing in the wake of the higher consultant rates included in the 2024 updates. - Create a preferred vendor program for government-sponsored enterprise (GSE) renovation products.
GSE renovation loan programs expose lenders to recourse risk during the construction phase, which discourages lender participation.
These programs could be improved by designating preferred vendors in each region who could give a quote on the renovation, assume the risk of completing the renovations within budget, and ensure it passes inspection.
This approach would shift renovation risk to the parties best positioned to manage it (i.e., contractors) but would require the GSEs to formally designate eligible vendors. - Reevaluate stand-alone second-lien renovation financing.
Current FHA and GSE renovation products are designed for purchase or refinance transactions and are poorly suited for borrowers with low-rate first mortgages. Similarly, cash-out refinance loans can be used for repairs where the amount borrowed doesn’t exceed 80 percent of the property’s mark-to-market loan-to-value (LTV) ratio, but that also requires refinancing the first mortgage.
None of these mortgages are stand-alone second mortgages for home improvement.
In 2024, Freddie Mac proposed a second-lien program that would allow borrowers to retain their low-rate first mortgage and take out equity via a second mortgage, as a substitute for a cash-out refinancing in a higher-rate environment. The program applies the same 80 percent LTV ratio requirement that applies to cash-out refinance loans. Reevaluating this second-lien program for borrowers who will use the funds for home improvement could help the FHA and the GSEs connect more households to the funds they need to repair aging homes.
Let’s help communities build more secure, hopeful futures.
Today’s complex challenges demand smarter solutions. Urban brings decades of expertise to understanding the forces shaping people’s lives and the systems that support them. With rigorous analysis and hands-on guidance, we help leaders across the country design, test, and scale solutions that build pathways for greater opportunity.
Your support makes this possible.
