Purchasing a fixer upper can be an attractive option for homebuyers looking to add value through renovations. However, financing these types of properties with a conventional mortgage can be challenging. This comprehensive guide examines using conventional loans for fixer uppers – from eligibility requirements to loan programs and tips for securing approval.
Overview of Conventional Loans
Conventional loans refer to mortgages that conform to standards set by Fannie Mae and Freddie Mac. They have more flexible criteria than government-backed FHA and VA loans, but still have requirements for credit scores, income, and down payments.
Conventional loans come in two main types:
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Conforming Loans – Loan amounts up to the conforming limit set annually by Fannie Mae and Freddie Mac. For 2023, this limit is $726,200 for single-family homes in most areas.
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Jumbo Loans – Loan amounts above the conforming limit Require higher down payments and credit scores
Interest rates on conventional loans may be fixed, adjustable, or a mix. Popular options include 15-year or 30-year fixed rates.
Using a Conventional Loan for a Fixer Upper
Though conventional loans are not tailored specifically for renovations they can still finance fixer upper purchases if certain criteria are met
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Property condition – While some minor repairs are acceptable, the home cannot have major structural or safety issues and must be habitable in its current state.
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Appraisal – The post-renovation value must appraise high enough to support the loan amount needed.
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Down payment – Expect a 20% down payment, though lower may be possible with mortgage insurance.
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Borrower qualifications – Strong credit, income, and cash reserves will improve chances of approval.
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Escrow account for renovations – An escrowed sum is sometimes required to guarantee completion of renovations.
Conventional Loan Programs for Fixer Uppers
Certain conventional loan programs offer added flexibility for financing fixer uppers:
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Homestyle Renovation – Allows financing repairs up to 50% of the home’s value.
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Fannie Mae HomeStyle – Permits non-structural renovations and up to 15% of the purchase price.
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One-Time Close – Single-closing construction loans draw renovation funds from a reserve account.
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Freddie Mac CHOICERenovation – Repair financing up to $200,000 along with purchase loan.
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Renovation Escrow – An escrow account ensures completion of renovations after closing.
Tips for Qualifying for a Conventional Fixer Upper Loan
Though challenging, getting approved for a conventional mortgage on a fixer upper is possible with the right strategies:
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Shop around for a lender experienced in financing renovations. They can advise the best programs and documentation needed.
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Get contractors to estimate repairs upfront to include in the loan application. This shows the lender you have a solid renovation plan.
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Seek a property below your approval thresholds for purchase price, loan amount, and monthly payments. This offsets the risk from repairs needed.
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Focus on renovations that improve livability rather than luxuries. Stick to necessities like roof, plumbing, HVAC to avoid denials.
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Provide renovation specifications and timelines. The more detailed information you have, the better.
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Secure a qualified contractor ahead of time who is licensed, bonded, and insured.
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Maximize your down payment and cash reserves. The more skin you have in the game, the more reassurance for lenders.
What to Know About Fixer Upper Appraisals
Valuing fixer uppers appropriately is key to securing financing:
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Appraisals are based on the home’s current condition and estimated value after repairs.
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Work with appraisers experienced in renovations who will review your contractor estimates.
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You may need to order an “as-completed” appraisal showing the value with renovations factored in.
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Repairs should equal no more than 50% of the current value to avoid denials.
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Focus planned renovations on updates that will maximize appraisal value – kitchens, bathrooms, finishes.
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Be prepared to provide comps for similar renovated homes to help justify the future appraised value.
Pros and Cons of Using Conventional Loans on Fixer Uppers
Pros
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Lower rates and more lenient standards than government loans
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Allows purchase and renovations to be rolled into one loan
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Variety of renovation focused programs available
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May be able to finance a higher purchase price than with other loans
Cons
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Stricter limits on repairs than specialized renovation loans
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Meeting minimum requirements for credit, income and down payment can be challenging
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Rates may be higher than conforming loans on move-in ready homes
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Securing financing is very dependent on appraisal accurately reflecting increased property value
FAQs About Conventional Fixer Upper Loans
Can I get a conventional loan for a home needing major renovations?
Major structural issues and problems impacting livability will likely disqualify a home for conventional financing. Minor cosmetic fixes are usually acceptable.
What credit score is needed for a conventional fixer upper loan?
Aim for a minimum score of 620, with 680+ ideal. The higher the better to offset the increased risk of a fixer upper.
Is mortgage insurance required if I don’t make a 20% down payment?
Yes, if your down payment is under 20% of the purchase price, you’ll have to pay for mortgage insurance.
How do I ensure there are funds to complete the renovations?
Options include holding back funds in an escrow account, using a construction loan, or having your own cash reserves for repairs.
Should I purchase a fixer upper investment property or primary residence?
Primary residences qualify for more programs and better rates. Investment properties will have stricter requirements.
The Bottom Line
Securing conventional financing for fixer uppers takes extra effort but can provide mortgage terms that aren’t possible with renovation-specific loans. Tapping the right conventional loan program and arming yourself with thorough cost estimates, solid appraisal comps, and knowledge of lender requirements will go a long way towards successfully funding your next fixer upper purchase.
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.
Your guide to buying a fixer-upper home
Fixer-upper homes often look more attractive in a hot housing market. Their prices are typically lower and there may be less competition from other buyers.
In this guide, we share pointers to help you find, buy, and finance a fixer-upper property. If you’re ready to roll up your sleeves and invest some sweat equity, these fixer-upper loans will roll the cost of renovations into your mortgage loan and help you build your dream home.
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