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Fixer-Upper Loans: Best Options for 2021

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Fixer-upper loans combine the purchase or refinance of a property with the cost of renovating it. This unique mortgage option addresses the challenge buyers often face when figuring out how to finance a fixer-upper.

In today’s climate of rising home prices, some shoppers end up buying a house to renovate instead of competing for higher-priced, move-in ready homes. Thanks to the multiple types of home loans for fixer-uppers, buyers can finance a home and the cost of renovations simultaneously.

4 fixer-upper loan options

Borrowers have multiple options for financing a fixer-upper. From government-backed mortgage programs to conventional loans, lenders offer remodel loans that cover the cost of buying a property and renovating it in a single mortgage.

With a fixer-upper loan, buyers borrow the total amount of the home price and renovation expenses upfront. The lender holds the funds for the repairs in an escrow account and disburses them to the approved contractor or builder throughout the project. Typically, fixer-upper loans also have contingency reserve funds set aside to cover unexpected renovation costs.

Keep in mind that fixer-upper mortgages may come with additional fees compared with traditional home loans, since the lender may need to make further inspections and disbursements during the construction process.

Here’s a look at four types of home loans for fixer-uppers.

Fannie Mae HomeStyle renovation loan

Fannie Mae’s HomeStyle® Renovation Mortgage is a conventional (non-government) fixer-upper loan. The program allows homebuyers and existing homeowners to combine a home purchase or refinance with the cost of renovations upfront in a single loan.

Loan amounts for the HomeStyle remodel loan are based on either the purchase price of the home, along with the cost of renovations, or the expected value of the property once renovations are completed.

Because this is a conventional rehab loan, homebuyers finance their home directly with private banks or mortgage companies that offer this product, and Fannie Mae purchases the loans from lenders.

Fannie Mae HomeStyle® Renovation loan features
Loan types Purchase; limited cash-out refinance
Loan terms 15- and 30-year fixed-rate loans; adjustable-rate loans
Down payment Minimum down payments range from 3% to 25%, depending on the property type, borrower’s income and loan type.

(Borrowers can use funds from Fannie Mae’s Community Seconds®, a second mortgage option, for the down payment.)

Property types One- to four-unit homes, condos, co-ops and manufactured housing (renovation funds on manufactured housing are capped at the lesser of $50,000 or 50% of the appraised value of the home after it’s completed).
Owner occupancy requirements Two- to four-unit properties must be the borrower’s principal residence. Borrowers can use the loan for one-unit investment properties and one-unit second homes.
Loan-to-value (LTV) ratio  Up to 97% LTV depending on the property type (105% when paired with Community Seconds® financing)
Loan requirements 
  • 620 minimum credit score (higher scores required depending on borrower’s down payment and debt-to-income (DTI) ratio)
  • Renovations must be completed within 12 months
  • Renovations must be completed by a licensed contractor (DIY option allowed if the repairs don’t exceed 10% of the final value)
  • Buyer must complete homeownership education if the loan has an LTV higher than 95%

Freddie Mac CHOICERenovation loan

Like Fannie Mae’s remodel loan, the CHOICERenovation® Mortgage from Freddie Mac is a conventional loan for fixer-uppers. Homebuyers and homeowners can rehabilitate, renovate, repair or restore an existing home by combining a refinance or home purchase in a single mortgage.

CHOICERenovation® loan amounts are based on the expected value of the property once renovations are completed, or the total of the as-is purchase price and the estimated cost of renovations.

Borrowers can pair this fixer-upper home loan with some of Freddie Mac’s other mortgage programs, including Home Possible®. Like all conventional loans, borrowers finance the home directly with a private lender.

Freddie Mac CHOICERenovation® loan features
Loan types Purchase; refinance (non-cash-out)
Loan terms 10- 15-, 20- and 30-year fixed-rate loans; adjustable-rate mortgages
Down payment Minimum down payments range from 3% to 20%, depending on the property type, borrower’s income and loan type.

(Borrowers can also use funds from Freddie Mac’s Affordable Seconds®, a second mortgage option, for the down payment.)

Property types One- to four-unit homes, condos, co-ops and manufactured housing. (Renovation funds on manufactured housing are capped at the lesser of $50,000 or 50% of the appraised value of the home after it’s completed.)
Owner occupancy requirements Two- to four-unit properties must be the borrower’s principal residence. Borrowers can use the loan for one-unit investment properties and one-unit second homes.
Loan-to-value (LTV) ratio  Up to 97% LTV depending on the property type (105% when paired with Affordable Seconds® financing)
Loan requirements 
  • 620 minimum credit score (higher scores required depending on borrower’s down payment and DTI ratio)
  • Renovations must be completed within 12 months
  • Renovations and repairs must be made to an existing dwelling
  • The borrower can act as contractor if licensed

FHA 203(k) loan

The Federal Housing Administration (FHA) offers the government-insured FHA 203(k) fixer-upper loan program. FHA renovation loans provide a single mortgage that covers both the purchase and rehabilitation of the property. Because the mortgages are federally insured, FHA-approved lenders are more willing to give loans. This can be helpful when the initial condition and value of the property wouldn’t be good enough for traditional lending.

Borrowers must adhere to FHA’s guidelines for completing renovations and may be limited to the type of home renovations they can perform. For example, FHA renovation loans don’t permit borrowers to install “luxury improvements,” such as a swimming pool.

When financing a property with an FHA home improvement loan, 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  FHA fixer-upper loans under the 203(k) loan program: 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.

FHA 203(k) loan features
Loan types Purchase; refinance
Loan terms 15-, 20-, 25- and 30-year fixed-rate loans; adjustable-rate loans
Down payment 3.5% minimum down payment with a credit score of 580 or higher (10% with a credit score between 500 and 579)
Property types One- to four-unit homes, approved condos and manufactured housing
Owner occupancy requirements Borrowers must live in the property as their principal residence (can’t be used on investment properties).
Loan-to-value (LTV) ratio  Up to 96.5% LTV on purchases; 80% LTV on refinances
Loan requirements 
  • 500 minimum credit score (580 if putting less than 10% down)
  • Loan amounts are subject to FHA loan limits; 203(k) limited renovation loan cannot exceed $35,000
  • Borrowers are limited to renovations approved by FHA
  • Borrower must work with a 203(k) consultant to inspect the property and provide a cost estimate of repairs; limited 203(k) borrowers don’t have to use a 203(k) consultant, but the borrower may choose to work with one

VA renovation loan

Eligible members of the military may be able to finance their fixer-upper with a VA loan for alteration and repair, which is backed by the U.S. Department of Veterans Affairs (VA). Service members, veterans and qualifying spouses can combine a VA purchase loan or VA cash-out refinance with their renovation costs.

Standard requirements for VA loans apply; however, the VA accommodates a higher purchase price based on the home’s expected value once renovations are complete, or the current value of the property plus the renovation costs.

VA renovation loan features
Loan type Purchase; cash-out refinance
Loan terms Fixed-rate loans, adjustable-rate loans
Down payment As low as 0%
Property types One- to four-unit homes, condos
Occupancy requirements Borrowers must live in the home as their principal residence.
Loan-to-value (LTV) ratio  Up to 100%
Loan requirements 
  • No minimum credit score (Although lenders often look for 620 or higher)
  • Alterations and repairs must be comparable to similar properties
  • Borrower must use a VA-approved builder or contractor

Should you buy a fixer-upper?

Some home improvement shows glamorize the process of buying a fixer-upper. While it is amazing to transform or restore a property, buying a house that needs renovations requires a lot of hard work and skill. It’s not uncommon to underestimate what you can afford and get in over your head.

That being said, with rising home prices, buying a fixer-upper can provide an affordable path to homeownership. Here are some things to keep in mind as you consider how to finance a fixer-upper.

  • Your budget. Can your budget support the payment on your remodel loan plus additional renovation costs if necessary? Before applying for a fixer-upper mortgage, crunch the numbers and be sure you can afford the payment.
  • Your time frame. Some fixer-upper loans specify the time frame for completing repairs. Be realistic about the scope of the projects you plan to tackle and whether you can complete them on time.
  • The cost of buying a fixer-upper home compared to a move-in ready home. The price of buying a home that needs work can sometimes exceed what a buyer would have spent on a comparable move-in ready home. Since some remodel loans come with additional fees, you’ll have some costs you wouldn’t have if you bought a traditional home.
  • The local market. Work closely with a real estate agent to determine if buying a fixer-upper in your market makes sense. Be sure the cost of the purchase and the renovations will provide a decent return on investment.

Pros and cons of buying a fixer-upper

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

Pros Cons
  Your purchase price may be lower than a move-in ready home. With the median home price of existing and new homes increasing, buying a house that needs work could be cost-effective. There also tends to be less competition from other buyers when buying a fixer-upper home, so you may be able to avoid a bidding war.   You won’t be able to move in immediately after your mortgage closes. When buying a house that needs renovations, you’ll likely have to wait until the repairs are complete before moving in. This may provide additional expenses during the transition period.
  You’ll be able to customize the home. Buying a fixer-upper home is the next-best thing to building one from scratch. You’ll be able to customize and renovate the house according to your preferences and needs.   Your mortgage could end up being as large as a loan on a move-in ready home. Depending on the purchase price and the renovations you plan to complete, your fixer-upper mortgage could be as large as or larger than the mortgage on a comparable move-in ready home.
  You can finance the home purchase and renovation costs with one loan. Fixer-upper loans make financing your renovations convenient by combining those costs with the home purchase into a single loan. This is a benefit over having a mortgage and an additional form of financing (such as a home equity loan), which often comes at higher interest rates.   You could pay more than expected for renovation costs and have a timeline longer than planned. Even when using licensed contractors, home renovations often go beyond the budget and expected time frame. This could pose a problem if you have to scramble to finance the remaining renovations. Additionally, you could run into issues with your local government regarding permitting, zoning, etc., that extend the project’s timeline.
  Your home’s value may increase faster than a move-in ready property. Buying a house to renovate will give you a faster home appreciation than a turnkey home. As soon as the renovations are complete, the home’s value will be higher than it was at the time of purchase. This provides an advantage over purchasing a move-in ready home, which will appreciate more gradually. You’ll be competing with contractors and investors. While there is less competition when buying a fixer-upper, some of the other buyers you may be up against will likely be contractors and investors. If you get into a bidding war, you may lose out on properties to all-cash buyers or those who can close more quickly.
 

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