Everything You Need to Know About Loans for Fixer Upper Homes

Buying a fixer upper home can be an exciting way to get your dream house at a discounted price With some elbow grease and TLC, you can transform a dated or neglected property into your perfect home But financing these types of renovation projects takes some extra planning compared to a move-in ready house. Specialized loans for fixer uppers make it possible to purchase a home in need of repairs and fund the necessary upgrades in one loan.

In this comprehensive guide, we’ll explain what loans for fixer uppers are their pros and cons different types available, and tips for getting the best financing deal. With the right loan, you can buy a diamond in the rough home, renovate it to match your style, and end up with significant equity for less than a turnkey property would have cost.

What Are Loans for Fixer Upper Homes?

Loans designed for fixer uppers, also called renovation loans or construction loans, provide financing for both purchasing and repairing the home in a single loan. Borrowers receive one lump sum to cover the as-is purchase price plus additional funds earmarked for renovations. This avoids the hassle and fees of a separate personal loan or home equity loan to fund repairs.

With a fixer upper loan, a lender will assess the property’s expected value after renovations and base the loan amount on that appraisal. So while the home may be outdated or dilapidated now, its valuation assumes you’ll bring it up to modern standards with the loan proceeds.

These loans also have relaxed lending standards to account for the fact the home needs repairs. Things like lower minimum credit scores, higher debt-to-income ratios, and even alternative credit data may help you qualify.

Pros and Cons of Loans for Fixer Uppers

Using a specialized fixer upper loan has some clear benefits but there are also risks to weigh when financing home renovations.

Pros

• Finance purchase and renovations in one loan
• Potentially lower mortgage rates than alternatives
• Streamlined process with one closing
• May have more flexible qualifying guidelines
• Tap into home equity without refinancing

Cons

• Total loan amount must cover all costs
• Risk of underestimating repair budget
• Short timeline for completing work
• Home won’t appraise if renovations aren’t done well
• Higher rates and fees than conventional loans

Doing your homework on accurate renovation budgets and getting contractor cost estimates upfront are key to ensuring the loan amount sufficiently covers all projected expenses.

Types of Loans for Fixer Upper Homes

Many mortgage programs offer loans tailored specifically for financing home renovations along with the purchase. Here are some of the most common types of loans for fixer uppers:

• FHA 203(k) Loan – Government-backed loan from the Federal Housing Administration with just 3.5% down and low credit score requirements. Covers repairs up to $35,000.

• Fannie Mae HomeStyle Loan – Conventional loan option allowing repairs up to 50% of the home’s value. Requires just 3% down and a 620 credit score.

• VA Renovation Loan – Zero down payment loan for veterans allowing repairs up to $6,000 with no home appraisal needed.

• USDA Renovation Loan – Special USDA-backed loan for low-income borrowers in rural areas to finance repairs with 100% financing and no down payment.

• Freddie Mac CHOICERenovation – Conventional loan from Freddie Mac very similar to Fannie Mae’s HomeStyle requiring 3% down and a 620 credit score.

Each program has specific requirements, eligible loan amounts, and guidelines for the types of renovations covered so compare options thoroughly.

Tips for Getting the Best Fixer Upper Loan

Finding the right loan for your fixer upper renovation project takes some savvy financing moves. Follow these tips to secure the best loan terms:

• Get pre-approved – Having a pre-approval letter in hand shows sellers you’re a serious buyer and can help strengthen offers.

• Check credit reports – Review all three credit reports for errors that could impact your score and eligibility. Dispute any inaccuracies found.

• Lower your debt – Reducing credit card balances and other debts ahead of time will help your debt-to-income ratio and loan eligibility.

• Shop multiple lenders – Compare quotes from several lenders to make sure you get the lowest rates and best fees.

• Ask about down payment assistance – Many programs provide grants, low interest loans, or deferred loans to cover your down payment if needed.

• Hire contractors for estimates – Accurate contractor estimates are key to ensuring the loan fully covers repair costs.

With the right fixer upper loan, you can tackle renovations with confidence. Just be sure to budget carefully and the home of your dreams will soon be yours!