Borrowing to Buy a Fixer-Upper

Fixer-Upper Loans

Borrowing to Buy a Fixer-Upper When buying a fixer-upper that needs a remodeling budget, a typical fixed-rate mortgage isn't going to help you pay for repairs. A lender isn't going to approve a $250,000 loan to buy a home that's only worth ...

Borrowing to Buy a Fixer-Upper

When buying a fixer-upper that needs a remodeling budget, a typical fixed-rate mortgage isn’t going to help you pay for repairs.

A lender isn’t going to approve a $250,000 loan to buy a home that’s only worth $200,000. And, while homeowners sometimes use home equity loans to remodel, you can’t get a home equity loan when you have no equity. This can be a big obstacle for buyers who don’t have extra cash to make needed renovations or repairs before moving in.

Luckily, there are two loan programs that can make your dream of rehabbing a fixer-upper a reality: the Federal Housing Administration’s 203(k) mortgage and Fannie Mae’s HomeStyle Renovation mortgage.

The programs achieve the same goal — providing homeowners with a mortgage and access to money to make necessary improvements — but come with different requirements and best serve different types of buyers.

FHA 203(k)
This type of financing is ideal for borrowers who either have little money for a down payment or who have an average or slightly below-average credit score.

The FHA requires a credit score of at least 580 if you want to make the minimum down payment; if you have 10% down, your score can be as low as 500. Lenders may have higher requirements.

The two different types of 203(k) mortgages got new names in 2015. Formerly called the regular or full 203(k) and the streamline 203(k), they’re now called the standard 203(k) and the limited 203(k).

The standard 203(k) loan is for almost any kind of repair or improvement — even the reconstruction of a demolished home, as long as the original foundation remains.

Any home more than 1 year old is eligible for a 203(k) loan.

Repairs must cost at least $5,000, and homeowners must hire a 203(k) consultant, who, for a fee of a few hundred dollars, determines whether the project is financially feasible, inspects the property, prepares or contracts out architectural exhibits and oversees the work.

You can borrow more than the home is worth, as long as the repairs will increase its appraised value.

The most you can borrow is 110% of what an appraiser estimates it will be worth after renovations, or the cost of the home plus the estimated renovation cost, whichever is less, minus your down payment. The minimum down payment on an FHA loan is 3.5%.

The maximum also must fall below the FHA mortgage limit for the area — $271,050 for single-family homes in most parts of the country and up to $625,500 in high-cost areas.

But a couple of rules governing these loans have been relaxed to:

Eliminate the cap on how much can be spent to repair or remove in-ground swimming pools. (Adding a pool is still not allowed.)
Permit foundation repairs. The old rules required a home’s original foundation remain untouched.

Considerations

Although FHA loans have the benefit of a low down payment, in many instances, FHA may be a more expensive financing option and should be considered after thoroughly evaluating all other product options that meet your credit qualifying and financial needs.
Financing may not be available for luxury items, such as a pool, hot tub or spa with all programs.
Requires hiring a contractor.

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