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Eric McWhinnie
Today's red-hot housing market has ushered in red-hot housing prices. If you're looking for a way to minimize the size of the mortgage you take on, buying a fixer-upper can be a great option. Buying a fixer-upper is not for the faint of heart, though. It takes work, imagination, and a good measure of patience. Here, we'll tell you more about what you can expect when you finance a fixer-upper.
What is a fixer-upper home?
A fixer-upper is a home that needs repairs. These repairs can be anything from cosmetic improvements to major renovations. Buying a fixer-upper home can be a rewarding investment. Since you're buying the home at a discount, renovations can increase the home's value.
What mortgage options are available for fixer-uppers?
There are plenty of mortgage options designed for people who want to buy a fixer-upper and make improvements. These programs roll the cost of repairs into the mortgage. For example:
FHA 203(k) loan: While 203(k) loans are available through FHA lenders across the country, they are backed (insured) by the U.S. Department of Housing and Urban Development.
The 203(k) loan comes in two sizes: limited and standard. With a limited loan, the cost of repairs cannot go over $35,000. These are typically cosmetic upgrades. The 203(k) standard program covers any renovation plan with a price tag over $35,000.
To qualify for the FHA 203(k) loan program, you must meet the following requirements:
- Minimum credit score of 500 (with 10% down payment)
- Minimum credit score of 580 (with less than 10% down)
- Minimum of 3.5% down payment
VA Renovation Loan: Buyers eligible for a VA loan can also use a VA renovation loan to buy a fixer-upper. Through this program, current and former service members have access to the funds they need to buy and repair a fixer-upper with no money down.
The amount financed depends on how much the property is expected to be worth once all repairs have been completed. Like FHA's 203(k) loan, a buyer must work with a contractor to get quotes listing each planned improvement. Then, a VA appraiser becomes involved, reviewing the plan and coming up with a predicted value.
Unfortunately, many VA lenders do not offer the renovation version. If you are interested in a VA renovation loan but have trouble locating a lender that offers the program, you can call National VA Loans at 855-956-4040 for assistance.
To be eligible for a VA renovation loan, you must have a minimum credit score of 620 (or 640 if your loan amount exceeds the VA county loan limits).
Fannie Mae HomeStyle® renovation loan: Fannie Mae loans are mortgage loans that meet Fannie Mae requirements and are backed by the U.S. government.
The HomeStyle® renovation loan allows buyers to qualify with a down payment as low as 3%. As long as the work is permanently attached to the property, any renovation is eligible. Buyers must also work with a licensed contractor in most cases.
To qualify for a Fannie Mae HomeStyle® renovation loan, you must have a credit score of 620 or higher.
How much does it cost to fix a fixer-upper?
The cost of repairs depends on the property in question. You may find your dream home at a bargain-basement price, only to learn during the home inspection that the property has more problems than anticipated. When you buy a fixer-upper, you can expect to spend at least 10% of the home's value making renovations. And that's without adding a new kitchen. If your fixer-upper needs kitchen work, be aware that the average kitchen remodel ranges from $14,610 to $41,369, according to Angi.
Handling renovations for your fixer-upper
The nice thing about the renovation programs we've mentioned is that they clearly outline how home renovations must be handled -- from the contractor's list of estimates to when the renovation project must be completed. But that doesn't mean it's clear sailing.
Be honest with yourself about the work needed and your budget
Before you purchase a fixer-upper, consider these points:
- A project almost always takes longer and costs more than anticipated. While most renovation loan programs require you to factor in overages, it is still disappointing to spend more on hidden issues than you planned.
- If you decide to purchase a fixer-upper, expect to spend months immersed in the project.
Necessary supervision and appraisals
To protect the mortgage lender, fixer-upper homes come with increased supervision and appraisals. Depending on the loan, you may be required to hire a consultant to oversee and approve plans as well as inspect the property after each phase of the project is completed.
Is a fixer-upper a good idea for first-time home buyers?
A fixer-upper can be a great idea for a first-time home buyer, especially if they are the kind of person who enjoys the types of challenges a fixer-upper provides. For some home buyers, it's the best way to get into a home in a great neighborhood at a price they can afford. And there's guidance available. The best mortgage lenders for first-time home buyers can help walk the buyer through the process.
Whether you're a first-time home buyer or someone selling your current property with the hope of finding a home to renovate, there's an adventure associated with buying a fixer-upper. And if you do things right, you just might end up with enough equity in the property to make the entire experience worthwhile.
Still have questions?
Read more about fixer-upper homes:
Ready for mortgage pre-approval?
Getting pre-approved for a mortgage loan is an important step in the home buying process. Our experts recommend mortgage pre-approval before you begin looking at houses or deciding on a real estate agent.
FAQs
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When home prices and interest rates are high, it can be tough to find a home you can afford. You have the option of waiting until home prices or interest rates cool down and homeownership becomes more affordable, or you can reduce the amount of money you spend on a house.
Buying an inexpensive home, then using a renovation loan to make repairs and put your own stamp on its style may be worth exploring -- especially if you enjoy a project.
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It depends on the type of renovation loan and which jobs you would like to complete. Each program has its own rules regarding sweat equity.
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A lender will not allow you to exceed the loan amount for which you are approved. For example, if you're approved for a $300,000 mortgage and purchase a fixer-upper for $200,000, the cost of repairs cannot exceed $100,000.
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Dana George has a BA in Management and Organization Development from Spring Arbor University. For more than 25 years, she has written and reported on business and finance, and she's still passionate about her work. Dana and her husband recently moved to Champaign, Illinois, home of the Fighting Illini. And though she finds the color orange unflattering on most people, she thinks they'll enjoy Champaign tremendously.
Fact Checked
Eric McWhinnie
Eric McWhinnie has been writing and editing digital content since 2010. He specializes in personal finance and investing. He also holds a bachelor’s degree in Finance.
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