Purchasing a home that needs repairs can be a great way to get a deal in a competitive housing market. But securing financing requires some extra planning when the property isn’t move-in ready. In this guide we’ll look at options for using a conventional mortgage loan to buy and repair a home needing updates.
Conventional Loan Home Requirements
To qualify for a standard conventional loan, the home must meet basic requirements regarding safety, security, and habitability set by Fannie Mae and Freddie Mac The property should be
- Structurally sound with no major defects
- Connected to utilities and accessible by roads
- Zoned for residential use
- Insurable against standard home hazards
While a professional home inspection isn’t required, any major issues with the roof foundation electrical, plumbing, or HVAC systems must be addressed before closing.
When Minor Repairs Are Needed
If the home needs just minor cosmetic fixes like carpet cleaning or painting, a conventional loan can still work. The buyer simply budgets for these repairs after closing.
However, more extensive repairs like leaky roofs, faulty electrical, cracked foundations, or pest damage will make it difficult to qualify for standard financing. Either the seller will need to make repairs prior to closing, or the buyer will require a specialized renovation loan.
Using a Renovation Mortgage
When major renovations are required, a rehab loan allows you to roll the home purchase price and repair costs into one mortgage. Types of renovation loans include:
-
FHA 203(k) – Government-backed option requiring just 3.5% down
-
Fannie Mae HomeStyle – Conventional loan financing up to 97% of repair costs
-
Freddie Mac CHOICERenovation – Conventional loan for remodeling projects
These loans require appraising the home at its expected value after repairs. A contractor inspects the property and provides a detailed work estimate.
The renovation mortgage funds are held in escrow and disbursed in phases as work is completed. An inspector verifies each stage is finished per the scope of work before release of additional funds.
Tips for Financing Home Repairs
Here are some tips when using a mortgage to purchase and renovate a home:
- Get multiple quotes from contractors to accurately estimate repair costs
- Have a detailed plan for the renovation project before applying
- Only take on what you can afford – don’t overextend your budget
- See if the seller can provide a credit for any repairs at closing
- Look into energy efficiency rebates to help offset upgrade costs
- Keep extra funds in savings for unexpected overruns during work
Pros of Renovation Loans
The benefits of a rehab loan like FHA 203(k) or HomeStyle include:
- Purchase and repair costs in one loan
- May qualify with as little as 3.5% down
- Fixed low interest rate on entire amount borrowed
- Only one closing instead of multiple transactions
By working with a lender experienced in renovation financing, you can buy a home needing repairs without draining your savings or taking out multiple loans.
Using a HELOC for Minor Repairs
If less than $15,000 in repairs are needed, a home equity line of credit (HELOC) may be a lower-cost alternative to finance minor updates. A HELOC offers access to a revolving credit line secured against your home’s equity.
Pros of using a HELOC include:
- Typically easier to qualify than renovation loans
- Access cash as needed instead of a lump sum
- Only pay interest on what you use
- May offer lower rates than personal loans
The downside is spending limits around 15% of the home value. For major overhauls, a rehab loan offers more financing flexibility.
Should I Repair a Home Before Buying?
Trying to purchase a home needing repairs can certainly get complicated. Some buyers opt to look for a move-in ready home instead to avoid financing headaches.
But in many cases, homes requiring updates are listed below market value. If purchased at a deal price, minor renovations can still make financial sense and the home more valuable.
As a buyer, you have to weigh the pros and cons of taking on repairs vs. finding a home that needs no work at all. Know it may require some extra effort, but with the right financing, you can transform that fixer-upper into your dream home.
We Can Help With Home Improvement Loans
If you’ve found the perfect home but it requires some TLC, we can help you explore financing options. Our experienced loan officers know all the ins and outs of renovation mortgages and home equity loans. We’ll help determine the most affordable loan solution.
Buying a home needing repairs can take some extra work but also allow you to add value. Contact us today to start the process!
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.
Lender Required Repairs for Buyer’s Conventional Loan?!?!?!
FAQ
Can you use a mortgage to pay for repairs?
What will fail a conventional appraisal?
What makes a house habitable for a mortgage?
What does a conventional loan appraiser look for?
Can you finance repairs in one loan?
You can finance repairs in one loan. You can roll the cost of buying the home and renovating it into a one-closing fixer-upper loan. You won’t need to apply for a home equity loan or another type of loan to pay for your renovation. You may build equity more quickly. Fixer-upper homes are usually priced below move-in ready homes.
Do conventional loans require a home inspection?
Although conventional loans don’t require a home inspection, it’s in the buyer’s best interest to get one. A home inspection report can turn up valuable information that won’t show up on a home appraisal. Verify your eligibility. Start here. For instance, a home inspector might find: Any of these issues could cost thousands of dollars to fix.
Can a home loan be a conventional mortgage?
However, in order for a home loan to qualify as a conventional mortgage, it must comply with lending rules set by Fannie Mae and Freddie Mac. These rules require: The loan limit for conventional mortgages varies by location. For 2020, the limit in most areas is $510,400. However, for higher-cost areas, the limit can be as high as $765,600.
Should you get a home renovation loan?
Some loans even allow you to finance a home purchase and renovation simultaneously. Whether you’re looking to renovate your kitchen, install a home office or finish your basement, any major home improvement is going to require some major money. A home renovation loan could be your path to getting the project underway sooner than you think.