Purchasing a fixer-upper can be a great way to buy a home at a discount in a competitive housing market. If you plan to use conventional financing there are some attractive loan programs that combine purchase and renovation costs into one mortgage.
Below we’ll explore popular conventional mortgages for financing fixer-uppers, key benefits and drawbacks, tips for getting approved, and more.
What Are Conventional Loans?
Conventional loans are mortgages that are not backed by a government agency like FHA or VA. Instead, they are provided by private lenders and conform to standards set by Fannie Mae and Freddie Mac
Some key features of conventional loans:
- Typically require higher credit scores and down payments than government programs
- Offer lower interest rates in many cases
- No ongoing mortgage insurance payments
- Popular options include 30-year and 15-year fixed rate mortgages
Well-qualified borrowers often prefer conventional loans for their competitive rates and flexible terms. When used to finance fixer-uppers, they provide key advantages as well.
Benefits of Using a Conventional Loan for a Fixer-Upper
There are a few reasons why conventional mortgages can be a great fit for financing home renovation projects:
Higher Lending Limits – Conventional loans provide more funds than government programs in high-cost areas. FHA caps fixer-upper loans at $300,000.
Lower Interest Rates – Conventional loans often come with lower rates, saving money over the life of the mortgage.
No Ongoing MIP – Conventional mortgages don’t require monthly mortgage insurance payments beyond an upfront fee.
Flexible Terms – Conventional loans allow longer 30-year terms, meaning lower monthly payments.
Easier Financing – Renovation costs can simply be rolled into the overall loan amount.
For buyers who meet eligibility requirements, conventional financing provides affordability and flexibility when tackling fixer-upper projects.
Popular Conventional Fixer-Upper Loan Programs
The two primary entities that back conventional mortgages, Fannie Mae and Freddie Mac, each offer conventional loan programs specifically for financing home renovations along with the purchase:
Fannie Mae HomeStyle Renovation – Features 97% LTV, 3% minimum down payment, and purchase plus renovation costs in one loan.
Freddie Mac CHOICERenovation – Nearly identical to Fannie’s program, with 3% down and combined purchase and renovation loan.
Freddie Mac CHOICEReno eXPress – Streamlined version for smaller projects up to 15% of the home’s value.
These programs provide an attractive all-in-one financing solution for buyers tackling fixer-upper projects.
Tips for Approval on a Conventional Fixer-Upper Loan
To qualify for a conventional mortgage for a fixer-upper home, there are a few key tips:
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Aim for 20% down – While 3% is allowed, 20% down will get the best rates and avoid PMI.
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Highlight renovation expertise – Lenders may want to see you have experience with home remodels.
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Get multiple renovation bids – Shop builders to demonstrate well-researched projected costs.
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Have ample savings and reserves – Extra savings help show you can cover any unplanned overages.
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Secure a strong credit score – Shoot for a minimum score of 680 or higher.
Meeting conventional loan requirements takes planning and diligence, but it expands your borrowing potential.
Potential Drawbacks to Consider
A few potential disadvantages exist when using conventional financing for fixer-upper homes:
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Strict credit and down payment requirements – Conventional loans don’t offer the wiggle room of government programs.
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No interest rate discounts – Unlike with government loans, you won’t receive rate discounts for paying points upfront.
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Mortgage insurance – With less than 20% down, you’ll pay PMI until reaching 78-80% loan to value.
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No DIY work allowed – All repairs must be done by licensed contractors.
While very viable, conventional loans aren’t the solution for all fixer-upper buyers due to stricter eligibility standards.
Alternatives to Conventional Fixer-Upper Loans
If you don’t meet requirements for a conventional mortgage, other potential options include:
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FHA 203(k) – Requires just 3.5% down and a 580 credit score minimum.
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VA Renovation – Features zero down payment for qualifying veterans.
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USDA Renovation – 100% financing available in designated rural areas.
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FHA 203(h) – For combining disaster repair costs into a purchase or refinance.
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HomeStyle Renovation for Manufactured Homes – Financing for mobile/manufactured housing fixer-uppers.
Finding the right loan often requires looking beyond just conventional programs. Shop multiple lenders to find your best fit.
Final Tips for Success with a Conventional Fixer-Upper Loan
Financing a fixer-upper project takes forethought and smart planning. Here are some final tips for success with a conventional mortgage:
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Vet all properties carefully upfront – don’t skimp on inspections
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Research rules for doing work yourself before making assumptions
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Build detailed renovation budgets and timelines and stick to them
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Keep a monetary buffer for unexpected overages and delays
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Make all mortgage payments on time during the renovation period
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Take your time to find the right lender who can guide you through the process
With proper diligence and care, a conventional loan can be the key to turning your fixer-upper dreams into reality.
The Role of Appraisers, Inspectors, and Underwriters in Loan Decisions
If you’ve been following us for awhile, you already know that appraisers, inspectors, and underwriters each play vital roles in the homebuying and loan match process. Appraisers determine the property’s value and ensure it aligns with the proposed offer. Inspectors focus on the safety and condition of the property, highlighting any necessary repairs or concerns. Underwriters evaluate the loan while considering safety and soundness issues that need to be resolved before closing. Ultimately, underwriters ensure the property meets the lender’s criteria and standards for a conventional loan.
What Is a Conventional Loan?
Unlike government-backed mortgages, conventional loans are offered by private lenders. The lending decisions are based on each private lender’s criteria, not government standards. Because of this, a conventional loans usually require buyers to have higher credit scores and put down larger down payments. Additionally, conventional loans come with property condition requirements. The home needs to meet safety and soundness standards that ensure that it holds enough value to serve as loan collateral.
The Surprising Secrets Behind Conventional Property Loans
FAQ
What is a conventional rehab loan?
Can you flip a house with a conventional loan?
Do you have to put 20 down on a conventional loan?
Can USDA loan be used on fixer upper?
Can you buy a fixer-upper with a conventional loan?
You can purchase a fixer-upper with a traditional conventional loan then pay for all the improvements out of pocket. Or, you can get a fixer-upper mortgage that’s designed to help you finance both the house itself and the renovations. Common types of home loans for fixer-uppers are:
What is a fixer-upper loan?
Fixer-upper loans are mortgage products that offer buyers enough money to cover both the purchase price of the home and the cost of renovations. Check your home loan options. Start here Many of these loans require special appraisals to establish the post-repair value of the home.
How do I pay for a fixer-upper?
Borrow a conventional loan to cover the purchase of the home. Note: Some government-backed mortgages, like FHA and VA loans, have strict property requirements that make it difficult to close on a fixer-upper. Take out a home improvement loan, such as an unsecured personal loan or line of credit, to pay for your renovation project.
Do you need three separate loans to buy a fixer-upper home?
In the past, you’d often need three separate loans to buy and repair a fixer-upper home. Those included: Check your fixer-upper home loan options. Start here Of course, having three separate loans is far from ideal. You’ll pay closing costs twice, at a minimum. Plus, personal loans can have lower budgets and higher rates for your renovation costs.