Fixer-Upper Home Loans
Fixer-Upper Home Loans
We talked previously about purchasing a fixer-upper… the pros, cons and considerations when buying a home that needs work. While the work involved in renovating a home is substantial, fixer-uppers can be a boon when you’re on a budget and looking for a home in just the right neighborhood.
But there’s an issue: You’re on a budget.
If you’re looking for a bargain, there’s a good chance that you might not be comfortable taking on the additional cost of permits, contractors, materials… The list goes on and on.
It’s a Catch-22. You’re looking for a bargain in a great neighborhood, but the cost of making it livable is going to make it just as unattainable as the nicer homes in the area…
Or is it? Before you give up on the idea, here are two home loans designed specifically for you.
FHA 203(k) Rehabilitation Loans
This loan is structured to finance an additional amount into your home loan, which is then used to renovate. With down payments as low as 3.5%, this is an excellent choice for those who don’t have a lot to put down on a home but can afford a mortgage. The loans are given based on an appraisal of not just the existing home, but the value of the home after construction is finished.
Once the loan closes, part of it goes to pay off the seller and the rest goes into an escrow account that can be used for renovation.
There will be a lot of paperwork with these loans, and the process is not fast. Work must be done by a licensed contractor, and it can be hard to find one willing to take on an FHA 203(k) project. There are many rules and guidelines regarding the kind of work that can be done, the length of time it can take and the permits and inspections that must be covered.
FHA 203(k) loans will come with a slightly higher interest rate, and because of the low down payment requirement, many buyers will also have to pay mortgage insurance. In addition, these loans require mortgage insurance for the life of the loan. The good news is after renovations are finished, the home’s value has often risen enough that the buyer will have more than 20% equity invested. After a waiting period, they can refinance to a different loan and lose the costly mortgage insurance.
There are two types of FHA 203(k) loans, standard and limited. Limited FHA 203(k) loans require less paperwork, have a quicker turnaround and are great for projects that will cost under $35,000. There is no minimum borrowing amount, and if the amount borrowed is less than $15,000, the process is even easier.
The standard FHA 203(k) loan can be used for larger projects and is more complicated than the limited loan. However, if you have major repairs to do, this is the loan you’ll need. There is no cap on the amount you can borrow (as long as it fits within the county’s FHA lending limits). In addition, if your home will be uninhabitable while the work is being completed, the standard loan will allow you to finance up to six months of the home’s mortgage into your loan.
Fannie Mae HomeStyle Renovation Loans
Like the FHA 203(k), Fannie Mae’s HomeStyle loan is designed with fixer-uppers in mind. It offers many of the same features, with a few important differences.
First of all, while FHA 203(k) loans are for owner-occupied properties only, there are HomeStyle options available for second homes as well as one-unit investment properties. This is important, as the FHA loan won’t fly for investors.
Another positive for the HomeStyle is that mortgage insurance is not always required. If you’re able to put 20% down, you can avoid that costly addition to your monthly payment… and unlike with an FHA 203(k), once your equity is over 80% you can drop the insurance. HomeStyle loans also allow for a wider variety of home improvements than FHA loans, which have an explicit list of eligible projects. And they can be used to finance accessory units (mother-in-law apartments, for example), whereas the limited FHA 203(k) loan does not.
HomeStyle loans can also be combined with other Fannie Mae products such as HomeReady (low down payments, cancellable mortgage insurance) and HomeStyle Energy (for efficiency upgrades) to make your purchase even more affordable.
On the negative side, while the FHA loans only require 3.5% down, a HomeStyle loan requires at least 5% in most cases. Standard FHA 203(k) loans allow you to borrow more, while HomeStyle loans only allow up to 50% of the as-completed home value.
Whether you choose an FHA 203(k) loan or a Fannie Mae HomeStyle loan, it’s important to find the right lender. Not all lenders are familiar with these loans, and because of the complexity of the process, you’ll need to find a lender who has experience with them. The right lender can help you get through the process with your sanity, wallet and home intact… but an inexperienced loan officer untrained in these specific loans can make the process very difficult. Find a great lender, work with them in advance, get your ducks in a row… and then go get your dream home!