Everything You Need to Know About Buying a Fixer Upper With a Loan

So you’ve found the perfect fixer upper home. It has good bones tons of potential and best of all – it’s affordable! But how do you finance a home that needs so much work? Getting a fixer upper loan can be tricky, but it’s definitely possible with the right strategy.

As a fellow aspiring homeowner and bargain hunter, I’ve spent a lot of time researching fixer upper loans. Here’s what I’ve learned about how these unique loans work, the pros and cons, and top tips for securing funding to DIY your dream home on a budget.

What Exactly is a Fixer Upper Loan?

A fixer upper loan is a mortgage that allows you to purchase and renovate a home in need of improvements, repairs, or upgrades.

These government-backed loans are issued by private lenders and insured by the FHA 203(k) program or Fannie Mae’s HomeStyle program. They roll the cost of repairs and renovations into your total mortgage amount, rather than requiring you to pay for upgrades out of pocket.

Fixer upper loans offer several perks

• Finance your purchase and remodel with one loan – no second mortgages or personal loans needed
• Typically require just 3.5-5% down payment
• Use future home value, not purchase price, to qualify for favorable rates and terms
• No need to live in unsafe or uncomfortable conditions during repairs – make fixes after closing
• One-time closing costs – saves thousands in fees over multiple loans

On the flip side, there are some challenges to be aware of:

• Strict guidelines on allowable repairs
• Require detailed contractor estimates upfront
• Monthly mortgage payments will be higher than a standard loan
• Additional fees for inspections and administration
• Total renovation costs capped at set percentage of home value

As long as you understand the ins and outs, a renovation loan can be an affordable way to turn a diamond-in-the-rough into your dream home.

FHA 203(k) Fixer Upper Loans

One of the most popular renovation financing options is the FHA 203(k) loan. It allows borrowers to wrap up to $35,000 in repairs into their mortgage on a 1-4 unit home.

The FHA 203(k) loan offers

• As little as 3.5% down payment
• Loans up to $625,500 in most areas
• Low credit score requirements – as low as 580 FICO
• Interest rates comparable to standard FHA loans
• Ability to finance structural repairs, upgrades, additions
• No limit on types of eligible improvements

There are two versions of the FHA 203(k) loan:

Standard 203(k): Covers renovations up to $35,000. Requires only contractor cost estimates upfront.

203(k) Limited: Covers renovations between $5,000 and $35,000. Requires contractor bids upfront to help streamline process.

Overall, FHA 203(k) loans offer flexible credit guidelines and substantial renovation funds. The primary drawback is that FHA caps loan amounts well below rates for conventional loans. These mortgages are best for buyers purchasing affordable homes that need moderate updates.

Fannie Mae HomeStyle Loans

Similar to the FHA 203(k), Fannie Mae’s HomeStyle program allows buyers to fold renovation costs into a conventional mortgage. These loans are issued by private lenders and insured by Fannie Mae.

The HomeStyle program offers several enhancements over 203(k) loans:

• Renovation costs up to 75% of home value (vs 50% for 203k)
• Higher loan limits – up to $970,800 in most areas
• Can be used to purchase and renovate a home you already own
• No minimum repair costs – includes modest projects

HomeStyle loans do come with stricter requirements than 203(k) loans, including:

• Minimum 620 credit score
• Higher debt-to-income ratios
• Require full contractor bids upfront
• Limited types of eligible improvements

Overall, HomeStyle loans offer lower rates and costs than FHA loans, with more flexibility on renovations. The catch is that you’ll need pristine credit and a hefty down payment to qualify.

Tips for Getting Approved for a Fixer Upper Loan

Fixer upper loans require extra planning and diligence to secure approval. Based on advice from experts, here are my top 7 tips for getting your renovation mortgage greenlit:

1. Shop with a 203(k) or HomeStyle lender: Not all lenders offer or have experience with renovation loans. Seek out a lender that specializes in 203(k) or HomeStyle lending.

2. Get pre-qualified: Talk to your lender and get pre-qualified before making an offer. This shows sellers you’re ready to move quickly.

3. Submit detailed contractor bids: Work with licensed contractors to get at least 3-5 itemized bids for all planned renovations.

4. Put down larger down payment: While 5% down is allowed, putting 10-20% down shows lenders you’re financially committed.

5. Improve your credit score: Work on paying down debts and correcting errors to boost your score over 620-640. This secures better rates/terms.

6. Lower your DTI: Reduce recurring debts so your total debt-to-income ratio is below 45%. This proves you can afford the larger mortgage payment.

7. Get an appraisal with “After Improved” value: Ask for an appraisal that estimates future home value after repairs. This allows you to qualify for more financing.

Remember, lenders need to see that you can responsibly manage a larger, complex loan. Come prepared with detailed bids, a down payment cushion, and improved credit – and your chances of approval go way up.

5 Things to Know Before Buying a Fixer Upper

While fixer uppers offer potential for value, they also come with pitfalls to avoid. Before you dive in, consider these factors:

1. Hidden issues are likely: Even after inspections, older homes can reveal decay, electrical problems, and structural issues once walls are opened up. Budget at least 15% extra on top of contractor estimates for surprise repairs.

2. Repairs take time: Most lenders allow 6-12 months for renovations. Be prepared to live in a construction zone or temporary housing during repairs.

3. Contractors make or break projects: Vet and monitor contractors closely. Get references, check licenses, review portfolios, and inspect work frequently. Shoddy or incomplete work can derail timelines and budgets.

4. Major renovations add costs: Kitchen, bath, structural, and system upgrades quickly inflate renovation budgets. Prioritize necessities like plumbing and electric to avoid cost creep.

5. Permits add time and fees: Depending on where you live and project complexity, permits and inspections can cost thousands and delay work for months. Mitigate this by working with contractors familiar with local regulations.

Going over budget or falling behind schedule on repairs can jeopardize your financing. Knowing potential pitfalls ahead of time allows you to plan carefully and build in buffers.

Finding the Right Fixer Upper Property

Not every run down house is worth taking on. Here are 5 tips for choosing a promising fixer upper candidate:

• Check foundation, roof, and structure first – Major issues here can bust renovation budgets
• Assess layout and floorplan – Open floorplans offer more flexibility
• Ensure plumbing and electric at least meet minimums – Upgrading full systems gets pricey
• Evaluate neighborhood and nearby comps – Area demand caps how much value upgrades add
• Pick cosmetic fixes over major additions – Big new additions rarely recoup their value

Amenities can be added – but issues like bad foundations or inadequate plumbing/electric must be addressed. Prioritize major systems, layout, and structural condition in your property search.

While a complete tear-down with additions allows total customization, these big projects often bust budgets and timelines. Opt for a home with good bones and cosmetic issues you can tackle over time.

Alternatives to Fixer Upper Loans

If you don’t qualify for a full renovation loan, here are a few options to still fund fixes:

FHA 203(h) Loan – Covers repairs up to $11,000 for homes in federal disaster areas

FHA Limited 203(k) – Streamlined version that covers simple upgrades up to $35,000

USDA Renovation Loan – For moderate repairs in rural areas; offers 100% financing

Cash-Out Refinance – Tap equity in a home you already own through a cash-out mortgage

HELOC – Access equity via a home equity line of credit for flexible borrowing

Personal Loans – Quick unsecured loans via banks, credit unions, and online lenders

Credit Cards – Put purchases on 0% intro APR cards and pay off during the promo

Sellers Assist – Ask