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Buying A Fixer-Upper: What Loans Are Available?

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If you’ve always dreamed of knocking down walls and bringing a distressed home to life just like your favorite HGTV stars, buying a fixer-upper property might be a worthwhile investment. In fact, a majority of homebuyers who watch renovation shows say they would consider purchasing a home that needs a ton of TLC.

The hard part? Paying for it all. Most traditional mortgages won’t allow you to finance the cost of significant repairs and renovations when you buy a home. This puts you on the hook for not only supplying the money for a down payment and closing costs, but finding enough in the bank to cover renovations.

Fortunately, you have options. This guide will highlight the options available for a fixer-upper mortgage and explain what you should consider before you strap on a tool belt.

We’ll cover:

Why would you buy a fixer-upper?

One of the main appeals of a fixer-upper home is its lower price point when compared to homes that are move-in ready.

“Fixer-uppers are more affordable than a new home and the buyer can still make it their own,” said Denise Supplee, a real estate agent with Long & Foster Real Estate in Doylestown, Pa. “If you are stringently budgeting with your upgrades and cognizant of the values of neighboring properties, buying a fixer-upper can make a good investment as well.”

Another reason you might buy a fixer-upper is because the competition may not be as stiff. Houses that need a lot of work tend not to sell as quickly because some buyers aren’t interested in putting a lot of time and money into renovations, Supplee said.

Fixer-uppers can also give you the potential to build equity at a faster pace. Although the trend of rising home values has been evident in many major housing markets across the U.S., it can take years for a traditional property to appreciate in value if its worth increases at all, depending on the overall real estate market and location. With a fixer-upper, renovations may increase the value of the home more quickly.

Fixer-upper loan options

If buying a home in need of repair sounds like the right move for you, there are a couple of loan programs specifically designed for purchasing fixer-upper homes. These loans will cover the cost of buying the property, as well as the cost of renovating the home. Keep in mind, though, that these loans may come with additional fees compared with traditional mortgages, since the lender may need to make additional inspections and disbursements during the construction process.

Conventional loans

Both Fannie Mae and Freddie Mac have loan programs catering to homebuyers who want to accomplish two goals with the same mortgage: purchasing and renovating a home. Keep in mind that these two government-sponsored enterprises don’t directly lend money to consumers, they only buy mortgages from other lenders. You’ll need to work with a private mortgage lender who provides conventional mortgage products.

Fannie Mae HomeStyle® renovation loan

Fannie Mae’s HomeStyle® Renovation Mortgage allows homebuyers and existing homeowners to combine their home purchase or refinance with the financing needed for renovations and repairs into a single mortgage, rather than seeking a secondary loan, such as a home equity loan or line of credit.

HomeStyle loans are available in 15- and 30-year fixed-rate mortgage terms, as well as some adjustable-rate mortgage terms. For a single-family home, you may be able to qualify for a down payment of as little as 3%.

To finance extra costs associated with renovations, borrowers frequently opt into Fannie’s Community Seconds® mortgage on top of the HomeStyle® loan. With that combination, you can finance up to 105% of the home’s purchase price.

Community Seconds® funds come from federal agencies, states, local governments and nonprofit organizations to help buyers cover the costs of purchasing a home, including closing costs, down payment and renovation expenses.

You’ll need higher credit scores to qualify for lower down payments. For example, if you’re buying a single-family fixer-upper, and you’re putting down less than 25%, you’ll need a 720 credit score or higher. If your down payment is at least 25%, your minimum credit score is 680.

Other guidelines for a HomeStyle® Renovation mortgage include the following:

  • For primary residences, one- to four-unit properties are eligible. Only buyers seeking one-unit investment properties and second homes can take advantage of this loan.
  • Manufactured homes are eligible, but the maximum renovation funds are capped at the lesser of $50,000 or 50% of the appraised value of the home after it’s completed.
  • Renovations must be completed within 12 months of the date of closing. Any type of renovation is eligible for the HomeStyle® program, as long as the work will be permanently affixed to the property.
  • In most cases, the work must be completed by a licensed contractor. However, Fannie Mae does offer a “Do It Yourself” repair option for one-unit properties only. DIY repairs may not represent more than 10% of the final value of the property, and the lender will inspect the completion of any repair items that cost more than $5,000.

If you’re not buying a single-family home, keep in mind: HomeStyle® purchase loans require a 15% down payment for two-unit properties and 25% down for three or four-unit properties.

Freddie Mac renovation mortgage

Similar to Fannie Mae’s product, Freddie Mac’s renovation mortgage program caters to homebuyers and homeowners looking to rehabilitate, renovate, repair or restore an existing home through a purchase or refinance transaction.

Renovation loans are available for fixed-rate mortgages with 15-, 20- or 30-year terms and most types of adjustable-rate mortgages. Borrowers must contribute a minimum down payment of 5% for a single-family home, 15% for a two-unit home and 20% for three- or four-unit homes.

The maximum LTV ratio, or the most you can borrow, is based on the smaller amount of two calculations: the purchase price plus renovation costs, or the appraised value of the home after the renovations are completed.

Freddie Mac’s renovation loans follow standard credit score guidelines. If you’re putting down less than 25% on a single-family home, you’ll need at least a 660 credit score. The required score is lowered to 620 for buyers putting down 25% or more.

Other eligibility guidelines include the following:

  • Primary, investment and second homes are eligible
  • Manufactured homes are not eligible.
  • Both cash-out and traditional refinances are eligible.
  • The homebuyer can’t be affiliated with or related to the builder, developer or home seller. This applies to renovation mortgages used to help finance the purchase of an investment property or second home.

Freddie Mac’s Home Possible® mortgages, which allow 3% down payments, aren’t eligible for renovation financing.

FHA 203(k) loan

The U.S. Department of Housing and Urban Development’s Federal Housing Administration, which insures loans made by approved lenders, offers 203(k) loans to homebuyers and existing homeowners who want to purchase or refinance a home and renovate it with a single mortgage.

An FHA 203(k) loan provides a single, long-term, fixed- or adjustable-rate mortgage that covers both the purchase and rehabilitation of the property. Because the mortgages are federally insured, lenders may be more willing to provide loans. This can be helpful when the initial condition and value of the property wouldn’t be good enough for traditional lending.

Supplee said buyers must work with a licensed contractor to provide a detailed listing of the costs associated with the repair or renovation. In some cases, DIY may be possible, but the buyer will need to provide a full list of materials, complete details of the project, local permits and all of the supporting documentation that a contractor would provide.

There are two types of 203(k) loans: limited and standard. A limited 203(k) loan is for smaller rehab jobs that cost $35,000 or less, while a standard loan is for more costly renovations.

To qualify for a standard FHA 203(k) loan, the home must be at least one year old, and the cost of the rehabilitation must be at least $5,000. The maximum you can borrow is typically the lesser of your purchase price plus rehabilitation costs, or 110% of the value of the home once renovations are complete.

The value can’t exceed the FHA loan limit for your county, which can be found on the HUD website.

Most of the borrower eligibility guidelines that apply to regular FHA loans apply to 203(k) loans, including:

  • A minimum credit score of 580.
  • A minimum 3.5% down payment.
  • The financing must be used for a primary residence; investment properties aren’t eligible.

FHA 203(k) loans can be used with 15-, 20-, 25- and 30-year fixed-rate mortgages as well as 1/1, 3/1, 5/1 and 7/1 ARMs. The types of renovations that qualify for an FHA 203(k) rehab loan include:

  • Structural alterations and reconstruction
  • Modernization and improvements to the home’s function
  • Elimination of health and safety hazards
  • Changes that improve appearance
  • Reconditioning or replacing plumbing; installing a well and/or septic system
  • Adding or replacing roofing, gutters and downspouts
  • Adding or replacing floors and/or floor treatments
  • Major landscape work and site improvements
  • Enhancing accessibility for a disabled person
  • Making energy conservation improvements

FHA 203(k) loans are provided through HUD-approved lenders. You can search for an HUD-approved lender in your area using the search tool on HUD’s website.

Other financing options

If you’d rather not combine your home purchase and renovation financing into one loan, there are other options for covering the rehabilitation of your fixer-upper property.

You could apply for an unsecured personal loan, which means the financing wouldn’t be backed by your home. Loan amounts typically range from $1,000 to $50,000, but may go higher depending on the lender.

Since personal loans are unsecured, interest rates are often higher than those of secured loans. Average personal loan rates for a borrower with a minimum 720 credit score range from 10.3% to 12.5%, while rates for a borrower with a credit score between 640 and 679 range from 17.8% to 19.9%, according to data from ValuePenguin, a LendingTree affiliate company.

Another option is an unsecured personal line of credit, which works similarly to a credit card. Once approved, you’re granted a credit line of a certain amount and only pay back the amount you borrow, plus interest. Once the balance is paid back, you’re allowed to reuse that available credit.

Personal lines of credit often range from $1,000 to $100,000 and have terms that usually last as long as five years. You may also be charged an annual fee. Average rates range from about 9-18%, depending on your creditworthiness.

Pros and cons of buying a fixer-upper

A fixer-upper can come with many potential benefits, but there are also drawbacks to choosing this type of property over a home that is move-in ready. Consider the pros and cons of a fixer-upper home.

Pros and Cons of a Fixer-Upper Home
Pros Cons
Usually has a lower purchase price than a move-in ready home. You won’t be able to move in immediately after your mortgage closing.
Gives you the opportunity to create the home you want. Your mortgage could end up being as large as a loan on a move-in ready home, depending on how your renovation costs add up.
Provides you the potential to roll your home purchase and renovation costs into one loan. Unexpected expenses could arise once the renovation job has started.
Typically increases your home value faster (after renovations are complete). You could run into issues with your local government regarding permitting, zoning, etc.

The bottom line

Financing isn’t the only consideration when purchasing a fixer-upper property. Home repair and renovation projects have a tendency to take longer and cost more than anticipated, whether you do the work yourself or hire a pro.

If you’re considering do-it-yourself renovations, be sure to weigh the benefits and disadvantages versus hiring a professional contractor.

“Often, people believe if they do it themselves, there are no costs,” Supplee said. “However, if you are not completely comfortable with repairs and rehabbing, leave it to a professional. I’ve seen others take on a project that ends up costing more because the homeowner didn’t know what they were doing — thus, wasting time and money.”

Do your homework when choosing a contractor. You’ll want to find someone who is qualified to perform the type of renovations you want completed, licensed and bonded. Your lender will need to approve your contractor, so this is a crucial step.

If you’ve got your heart set on buying a fixer-upper but need help navigating the complexities of financing both the purchase of your home and the needed renovations, there are loans that can help make your dreams a reality. Work with a lender who understands these products and has experience guiding borrowers through the process.

The information in this article is accurate as of the date of publishing.


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