Does trying to find an affordable home to buy feel like pulling teeth right now? You’re not imagining things. Even with small improvements to the (still) low housing supply, the homes coming on the market are often too expensive for a lot of house hunters.
Enter fixer-uppers. These are existing single-family homes that just need some TLC through repairs or renovations. They’re still livable, and they’re usually cheaper compared to similar houses that are in better shape.
But while a fixer-upper might be enticing price-wise, you need to know what you’re getting into.
Fixer-upper mortgage options
To finance a fixer-upper, many buyers turn to renovation loans. Renovation loans are mortgages that let you finance a house and improvements at the same time. With a renovation loan, you can pay off improvements over a longer period of time and at a lower interest rate than other types of financing. Options include:
- FHA 203(k): Offered through the Federal Housing Administration, FHA 203(k) loans allow lower income and credit scores than conventional mortgages. They can be used for many improvement projects, including making the home more accessible, repairing a swimming pool or building a garage.
- HomeStyle: Guaranteed by Fannie Mae, HomeStyle mortgages require higher credit scores than FHA 203(k) loans. But almost any improvements are eligible, including “luxuries” like a pool or landscaping.
- CHOICERenovation loan: Guaranteed by Freddie Mac, this mortgage allows borrowers to finance the purchase and renovation of a home in one loan with a minimum down payment of 5% (3% for first-time homebuyers).
- VA renovation loan: VA borrowers can finance the purchase and renovation of a home with one loan, though this product can be difficult to find, even among lenders that specialize in VA loans. Eligible projects are somewhat limited and work must be completed within 120 days of closing on the loan.
A fixer-upper mortgage may also help cover your mortgage payments if you have to live elsewhere while improvements are in progress and may include extra funds in case projects exceed the estimated cost.
How to determine the work needed and your budget
1. Consult the professionals
Before you make an offer on a fixer-upper home, get a professional home inspection done. This can give you a rough idea of what work is needed — and whether that work is reasonable or could turn into a money pit situation. Some important points a home inspection should check for include the foundation, roof, plumbing and electrical system.
After the home inspection, you’ll also want to hire a professional contractor to get a more accurate quote on what the renovations will cost. This should include not just the labor and materials but also permit fees (if applicable). You’ll also have to consider whether you’ll need to live somewhere else while the renovations are done.
2. Pick the right payment method for your project
Once you have a good idea of the costs, you can decide what type of financing is right for you based on your budget.
- Getting a renovation loan — such as a HomeStyle or CHOICERenovation loan — can expand your budget and let you tackle larger projects at the same time. If you choose a government-backed option, you might have limits on what kinds of renovations you can undertake. For example, while FHA 203(k) loans allow a wide range of projects, VA renovation loans are somewhat limited in usage.
- Getting a traditional mortgage means you’ll have to pay for upgrades with cash, a credit card or a personal loan if you want to start renovating right after closing. These bootstrapped financing options might put a low ceiling on your budget and come with a higher interest rate, so a home that needs simpler repairs may be right for you.
3. Expect roadblocks
Whether you DIY or hire a pro, don’t be surprised if there are roadblocks along the way. There’s a lot that can go wrong — and it’ll always take longer than you expect.
- There could also be delays with the mortgage process. For example, if you make an offer on a foreclosed home that’s owned by a lender, it can take weeks to get a response. That makes for a slow start to a project that could already take months to complete.
4. Budget for unexpected expenses
In addition to roadblocks, expect some surprise expenses, too. Adding a contingency of at least 10% to 20% to however much your contractor quotes you can be a good start. This way, you’ll have some extra wiggle room in case problems pop up along the way — and they often do.
5. Prepare for additional supervision and appraisals
Renovation loans often require extra consultations, inspections and home appraisals designed to protect the lender’s investment — as well as your own.
A standard FHA 203(k) loan, for example, requires you to hire a Department of Housing and Urban Development consultant who’ll approve your plans, manage contractor payments and inspect the property after each phase of work is complete.
These additional hurdles can be frustrating, but they help to ensure the work is on time, on budget and adds value to the home.
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