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Today's housing market is really tight. Historically low mortgage rates have driven up buyer demand and inventory is extremely limited. As such, if you look for a new home right now, you may get stuck buying a fixer-upper. Or perhaps you're intentionally looking to purchase a fixer-upper and renovate it according to your own tastes. Before you do, here are a few things you ought to know.
1. What you save on price, you might spend in repairs
Generally, a home that needs work will cost a lot less than a home that doesn't. But if your goal is to save money on your home purchase, a fixer-upper may not do the trick. That's because you might spend more on repairs in exchange for a lower purchase price.
Imagine you see two comparably sized homes on the same block. One costs $300,000 and looks great both inside and out. The other costs $250,000 but is largely in disarray. You might think the second home is the better deal since it's $50,000 cheaper. But you could easily spend $50,000 if there are major issues, so don't assume that buying a fixer-upper means you're getting a bargain.
2. You'll need a thorough home inspection
You might assume you'll simply need to pay for cosmetic fixes to get a fixer-upper into shape. Perhaps you'll need to rip out some old carpets, slap on a few coats of paint, and replace worn cabinets and countertops with newer ones. But you never know what issues could be lurking when you buy a home. If the property looks like it's in bad shape, it could have structural damage you never even imagined.
That's why it's so important to get a home inspection if you're looking at a fixer-upper. The housing market favors sellers these days, which has pushed some buyers to waive home inspections in an effort to get their offers accepted. But this is a bad idea when you're buying a fixer-upper, so don't be tempted to sacrifice that step.
3. You may be eligible for a special mortgage
It costs money to update a home in need of work -- money you may not have. The good news, however, is that there are special mortgages you can get to cover both your home purchase and the work it requires. They're known as renovation loans, and they're a good bet when buying a fixer-upper.
A couple of options you might look into? The Fannie Mae HomeStyle loan and FHA 203(k) loans. Both allow you to borrow extra for renovations that extend to both structural and cosmetic repairs. With these loans, your renovation dollars are put into an escrow account and used to pay for work as it's completed. You'll generally need a credit score of 500 or higher for an FHA 203(k) loan. For a HomeStyle loan, you'll need a score of at least 620.
Not everyone has the patience to deal with a major renovation. If you're up for it, then a fixer-upper may be a good choice. Just make sure you understand the scope of the work before diving in.