Buying a Fixer Upper Home with an FHA Loan: What You Need to Know

Purchasing a fixer upper can be an appealing option for homebuyers looking to get more house for their money. While these homes need repairs and upgrades, they are often priced lower to account for the work needed. For buyers with limited budgets or who enjoy DIY projects, a fixer upper with an FHA loan can be the perfect choice.

As a real estate agent often working with first-time homebuyers, one of the most common questions I’m asked is can you buy a fixer upper with an FHA loan? The short answer is yes, you typically can finance a fixer upper with an FHA mortgage. However there are important requirements and limitations to understand first.

In this comprehensive guide, I’ll cover everything you need to know about purchasing a fixer upper with an FHA loan, including:

• What constitutes a fixer upper home
• FHA appraisal and inspection requirements
• Using FHA 203(k) rehab loans for renovations
• Tips for securing financing as a fixer upper buyer
• Common mistakes to avoid with FHA fixer upper loans

Let’s dive in so you can make informed decisions when buying a home needing repairs with FHA financing,

What Qualifies as a Fixer Upper Home?

Not all homes needing work are considered fixer uppers Here are the key characteristics of a true fixer upper property

• Lower list price than comparable homes in good condition
• Requires cosmetic updates like flooring, paint, etc.
• May need minor repairs like leaky faucets, old appliances
• Needs significant renovations like kitchen or bath remodels
• Has outdated interior fixtures and finishes
• Could benefit from additions like a garage, patio, or attic build-out

The level of fixes needed classifies it as a fixer upper. A newly built home just needing paint is not the same as a fixer needing electrical and plumbing overhauls. Assess the scope of work needed to determine if a home qualifies as a true fixer upper.

FHA Appraisal and Inspection Requirements

Before financing a fixer upper with FHA, there are important appraisal and inspection requirements to note:

• Minimum property standards – The home must meet FHA minimum property standards and requirements after planned renovations.

• Appraisal with repairs value – Appraisers estimate the home’s value as-is and the value after renovations. Both must support the loan amount.

• Professional inspections – Licensed inspectors must evaluate structural, mechanical, and electrical systems prior to purchase. Deficiencies must be addressed.

• Escrow holdbacks – A portion of the loan may be held in escrow until renovations are complete if repairs are not finished pre-closing.

As the buyer, you’ll need to show a contractor’s bid or estimate for planned updates. The fixer upper must be structurally sound and safe to live in based on inspections.

Using an FHA 203(k) Renovation Loan

If your fixer upper needs major overhauls, an FHA 203(k) loan allows you to roll the financing for renovations into the mortgage. Here’s an overview:

• Finance up to $35,000 in renovations with a Streamline 203(k)
• Finance more extensive repairs up to the FHA mortgage limit with a Standard 203(k)
• One loan package includes purchase price + rehab costs
• Fixed rates, low down payments
• Contractor oversees renovations

A 203(k) loan simplifies buying and remodeling a fixer upper with one FHA-insured mortgage. Just keep in mind there will be additional fees and requirements compared to a regular FHA loan.

Tips for Securing FHA Financing on a Fixer Upper

As the buyer, you’ll need to prove you can afford mortgage payments during repairs plus the future value when shopping for FHA loans on fixer uppers. Here are some tips:

• Get pre-approved based on the future appraised value after improvements.
• Seek a higher credit score above 620 to improve change of approval.
• Make larger down payment if possible, at least 5% to 10%.
• Review contractor estimates and scope of work with lenders.
• Ask sellers to complete urgent repairs prior to closing via credit.
• Provide detailed renovation plans and timelines.
• Have funds set aside for cost overruns and unforeseen issues.
• Highlight experience with renovations in your loan application.
• Be conservative when estimating length of projects and costs.

Following these tips shows lenders you are a knowledgeable buyer who can take on a fixer upper responsibly.

Common Mistakes to Avoid with FHA Fixer Upper Loans

While financing a fixer upper home with FHA has benefits, there are also mistakes buyers often make I want you to avoid:

• Not budgeting properly for unexpected repair costs and delays

• Taking on more renovations than you can realistically finance and manage

• Not fully understanding 203(k) loan guidelines and requirements

• Not ordering mandatory FHA appraisal and inspections prior to closing

• Not consulting a contractor early about project costs and timelines

• Paying too much for a home that will still be overvalued after repairs

• Not having an experienced real estate agent to guide you through the process

Purchasing a fixer upper takes research, patience, and diligence. But buyers willing to put in the work can end up with a gorgeous home and plenty of equity.

Finding the Right Fixer Upper for You

As your real estate agent, it’s my job to help you find a fixer upper property suited to your budget, skills, and lifestyle. Here are things I consider when working with buyers interested in financing a home needing repairs with an FHA loan:

• Experience with DIY projects and renovations
• Access to reliable contractors if hiring out work
• Scope of renovations needed and estimated costs
• Timeline expectations for completing repairs
• Future plans for the home like selling or staying long-term

Not all buyers are prepared to take on a major fixer upper overhaul. Being realistic about your capabilities as a buyer is critical. I’m here to provide guidance each step of the way when pursuing an FHA-financed fixer upper.

Let’s Make Your Fixer Upper Dreams A Reality