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Buying a fixer-upper can provide a path to homeownership for first-time home buyers or a way for repeat buyers to afford a larger home or a better neighborhood. With the relatively low inventory of homes for sale these days, a move-in ready home can be hard to find, especially if you’re on a budget.
Fixer-upper houses — existing single-family homes in need of renovations or repairs — usually sell for less per square foot than homes that are in good shape, says Dan Bawden, president and CEO of Legal Eagle Contractors in Houston, Texas.
But before you start bargain hunting, you need to know what you're in for; renovations aren't as easy as they look on TV. Seemingly simple projects can become complicated once the demolition starts, and if costs end up higher than estimated, finishing your to-do list can take longer than anticipated.
Weigh these considerations to help decide if buying a fixer-upper is right for you.
Fixer-upper mortgage options
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. A VA-approved contractor is required, 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 a professional
Before buying a fixer-upper home, hire a professional contractor to estimate the cost of the work that’s needed before you make an offer. The house that’s right for you depends on your skills, schedule and the way you plan to finance the improvements.
“There’s less-than-perfect shape and then there’s total disrepair,” says Carolyn Morganbesser, assistant vice president of mortgage originations at Affinity Federal Credit Union in New Jersey.
» MORE: How to flip a house
2. Pick the right payment method for your project
For more simple repairs: You may be able to stick with a traditional mortgage and pay for upgrades with cash, a credit card or a personal loan 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.
3. Expect roadblocks
Whether you DIY or hire a pro, don’t be surprised if there are roadblocks along the way. “It always takes longer than you thought it was going to take because that’s the nature of remodeling,” Bawden says.
If you're looking at foreclosed homes, which often need work, brace for delays during the mortgage offer process as well, Morganbesser adds. With bank-owned properties, you’ll be negotiating with the lender that owns the property, and it may reject your offer more than once, she says. That makes for a slow start to a project that could take months.
4. 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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