Purchasing a fixer upper can be a great way to get into homeownership when housing prices are high. These homes typically sell for below market value since repairs and renovations are needed. However, financing a fixer upper takes some extra planning compared to buying a move-in ready house. You’ll need a special type of loan that covers both the home purchase and improvement costs.
Here’s a step-by-step guide to getting financing for a fixer upper from loan options to budgeting for repairs. With the right lender and loan program, you can turn that dated and dilapidated house into your dream home.
Step 1: Choose The Best Loan Program
The first step is choosing the right loan for your fixer upper purchase. You’ll want a single mortgage that includes both the purchase price and estimated renovation costs, rather than taking out separate loans. Here are top options to consider:
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FHA 203(k) Loan – Allows buyers to finance up to $35000 in repairs with only 3.5% down. But stay under the FHA loan limits in your county.
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Fannie Mae HomeStyle – Conventional loan covering purchase + renovations. Requires 3% down and 620 minimum credit score.
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VA Renovation Loan – For veterans and service members. No down payment or PMI required. Funds repairs and requires no minimum credit score.
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USDA Renovation Loan – 100% financing for low-income buyers in designated rural areas. Covers purchase price and repairs.
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Freddie Mac CHOICERenovation – Conventional loan with 3% down and 620 minimum credit score. Gives 12 months to complete renovations.
If you need major renovations, a conventional rehab loan like Fannie Mae HomeStyle or Freddie Mac CHOICERenovation may provide more flexibility. But for minor upgrades, an FHA 203(k) is a good budget-friendly option.
Step 2: Calculate Your Renovation Budget
Once you select a loan program, the next step is determining your repair budget. Walk through the home with a contractor to get itemized quotes for all needed work, including:
- Structural repairs – Foundation, roof, siding, electrical, plumbing
- Cosmetic upgrades – Kitchens, bathrooms, flooring, painting
- Exterior projects – Landscaping, fencing, driveway
Build out a detailed renovation budget spreadsheet, listing the costs for materials and labor on each project. Be sure to pad the budget by 10-20% for unexpected overages. This budget will be used by the lender to determine financing.
Step 3: Find The Right Lender
Not all mortgage lenders offer renovation loans. Ask local real estate agents for lender referrals. Online mortgage marketplaces also make it easy to compare quotes from multiple rehab loan lenders.
Look for a lender that offers the type of loan you need and has experience with fixer upper financing. They should walk you through what documents and contractor estimates you’ll need to apply and get approved.
Getting pre-approved at this stage ensures you can move quickly when you’re ready to make an offer.
Step 4: Shop For Your Fixer Upper
Once pre-approved, start hunting for the perfect home project! Drive around target neighborhoods and talk to real estate agents about off-market opportunities.
Pay attention to listing words like “contractor’s special”, “handyman’s dream”, or “renovation needed” as clues to potential fixer uppers.
Consider foreclosures and short sales, but budget for extra hassles like unpaid back taxes. And don’t waive the inspection, even if it puts your offer at a disadvantage.
Step 5: Submit Your Loan Application
When you find the right home and have an accepted offer, it’s time to complete the full loan application. Provide all required documents to your lender, including:
- Purchase contract and listing sheet
- Contractor’s itemized repair estimates
- Personal financial statements and paperwork
- Appraisal based on expected post-renovation value
Be meticulous providing every document needed to avoid delays in underwriting. Your real estate agent and loan officer can help guide you through this process.
Step 6: Close On Your Loan And Purchase
Once approved, you’ll sign final loan documents and wiring instructions. The lender will disburse funds to the seller directly at closing. Repair funds will be held in an escrow account and released in draws as work is completed.
Carefully review closing costs for origination fees, appraisal, and title insurance. Ask the lender to explain any confusing charges. Bring a cashier’s check for your down payment and closing costs.
Step 7: Complete The Renovations
Now the fun begins! Have your contractor lined up before closing so repairs can begin immediately. Be ready to live in a construction zone for weeks or months.
Work with your lender to schedule draws from the escrow account as phases are finished. Expect regular inspections to ensure the work meets standards.
Delays can happen, so build contingencies into your timeline and budget. With large home improvement loans, you may have 6-12 months to complete renovations.
Step 8: Build Home Equity
Once all renovations are finished, you’ll have a completely updated home likely worth significantly more than you paid. Submit the final inspection and completion paperwork to your lender.
Over time as you pay down the mortgage principal, you’ll build equity. Down the road, home price appreciation and renovation value added can provide equity to tap for future home improvement projects.
Key Tips For Success
- Stick to your budget – Cost overruns can put you overfinanced
- Get multiple quotes from contractors
- Keep a 10-20% contingency fund
- Research average renovation costs in your area
- Prioritize repairs over cosmetic upgrades
- Consider doing some work yourself to save money
- Communicate regularly with your lender and contractor
FAQs About Fixer Upper Loans
How much does a fixer upper loan cost?
You’ll pay typical closing costs of 2-5% of the total loan amount. Rehab loans may incur additional fees for extra oversight and draws from the repair escrow account.
What credit score is needed?
Requirements vary by lender and loan type, but you’ll generally need a 620 FICO score at minimum. Some VA and USDA loans can go lower.
Can I get a fixer upper loan for an investment property?
Yes, although not all products allow investor loans. Fannie Mae HomeStyle and Freddie Mac CHOICERenovation are two options.
How long do I have to complete repairs?
Timeframes range from 3-6 months up to one year. FHA 203(k) gives 6 months, while Freddie Mac’s CHOICEReno eXPress requires finishing in just 180 days.
Can I do some of the repairs myself?
Most loans allow you to do some renovations, but major structural repairs often require licensed contractors. Check your lender’s DIY rules.
The Bottom Line
With the right financing strategy and preparation, your dream of buying and transforming a fixer upper into a beautiful home can become reality. Following these steps will help you get approved, find the perfect home, budget accurately, and manage contractors to bring your vision to life.
USDA renovation loan
The USDA renovation loan is a financing option for buyers who want to purchase a single-family home in a location that has been designated a “rural area” by the U.S. Department of Agriculture. Fortunately, the definition is broader than many think — an estimated 97% of the U.S. qualifies. Use the USDA’s property eligibility tool to see which areas in your state are considered rural.
For those who are eligible, the USDA renovation loan requires no down payment and funds home improvement projects, upgrades to accommodate family members with disabilities, and installation of energy-efficient features.
Still, you’ll need to meet household income limits, so check your area median income (AMI) here. In addition, this type of loan cannot be used to finance investment properties — only primary residences are allowed.
Get prepared with an inspection and preapproval
Doing your “due diligence” means not skipping the home inspection — even though it can be tempting to waive an inspection when you’re in a bidding war.
In addition, before you begin to look at properties, get your financing lined up. If you plan to use a fixer-upper home loan, you’ll need to have a contractor estimate the scope and cost of repairs before you can get approved.
Real estate agents and sellers won’t take you seriously unless you can prove you’re qualified for financing. That means having a valid mortgage preapproval letter in your pocket.