Financing Your First Fixer-Upper Home: Tips for First-Time Buyers

Buying your first home is always an exciting milestone! But when that first home is a fixer-upper, it can also be a bit intimidating. As a first-time buyer how do you know if a fixer-upper is right for you? And how can you finance renovations along with your home purchase?

I’ve helped many clients finance and renovate their first homes over the years In this article, I’ll walk through everything you need to know as a first-time buyer looking at fixer-uppers

What Exactly is a Fixer-Upper?

A fixer-upper is a home that needs repairs or renovations to restore it to good condition. The home may be old and dated, with worn finishes or layouts that need updating. Often, fixer-uppers are priced below market value to account for the work needed.

As a first-time buyer, a fixer-upper can be appealing because purchase prices are lower. But these homes take extra work. You’ll need to budget for renovations and repairs on top of your down payment and closing costs.

Fixer-uppers range from minor cosmetic upgrades to significant structural repairs Common projects include

• Kitchen and bathroom remodels
• Replacing flooring and painting
• Roof repairs
• Electrical and plumbing upgrades
• Heating and AC system replacements
• Foundation work

The level of work needed will impact your financing options and renovation budget.

Should You Consider a Fixer-Upper?

Fixer-uppers aren’t for everyone. Before you start house hunting, think carefully about whether a renovation project fits your goals and lifestyle:

You need renovation skills. Taking on a fixer can be tough for first-timers. If you aren’t handy or don’t have renovation experience, consider a move-in ready home instead.

You have time for renovations. Fixer projects take months to complete. And you may not be able to live in the home during major work. Make sure you can accommodate a delayed move-in.

You can afford extra costs. Budget for inevitable surprises during renovations. Unforeseen issues can drive up contractor fees.

You’ll use a general contractor. Most fixer loans require you to work with a GC to oversee projects, adding to costs. DIY work is limited.

The home has good bones. Make sure the home’s core structure is sound before taking on cosmetic upgrades.

If you don’t have the time, budget, or skills for an extensive renovation, you may be better off looking for a home that needs mostly cosmetic refreshes only. But if you’re up for the challenge, a fixer-upper can be rewarding.

Financing Options for Fixer-Uppers

As a first-time buyer purchasing a fixer-upper, you’ll need a loan that covers both the home purchase and renovations. There are a few ways to finance this:

FHA 203(k) Loan

One of the most popular fixer-upper loans is the FHA 203(k). This government-backed mortgage offers low down payments and flexible credit requirements. You can borrow up to $35,000 for renovations based on your project estimate.

Pros:

• Lower down payment of just 3.5%
• Minimum credit score of 580

Cons:

• Renovations limited to $35,000
• Upfront and ongoing mortgage insurance

Conventional HomeStyle Loan

For more extensive renovations, a conventional HomeStyle loan from Fannie Mae may work better. HomeStyle loans offer higher income and credit standards but fully fund your renovations.

Pros:

• Finance unlimited renovations
• Minimum down payment of 3%

Cons:

• Require minimum 620 credit score
• Mandatory 20% downpayment if under 680 credit score

FHA 203(k) Streamline Loan

This is a capped version of the original 203(k) that finances renovations up to $35,000. Requirements are the same as the standard 203(k).

VA Renovation Loan

If you’re eligible for a VA home loan, you can include renovation costs in your financing. VA loans require no down payment or monthly mortgage insurance.

Cash-out Refinance

Another option is using a personal loan for renovations, then cashing out your equity with a refinance. This avoids renovation program requirements but can be more expensive.

Talk to a few lenders to learn more about program options and fees. Then choose the best loan for your budget and scope of renovations.

Tips for Buying a Fixer-Upper

Purchasing a fixer-upper takes extra care and planning. Here are my top tips as a first-time buyer:

Get prequalified before house hunting. Know your budget and get prequalified for financing. Being able to show sellers proof of funds will make your offer more attractive.

Inspect before purchasing. Thoroughly examine the home and consult inspectors to uncover major issues early. Build inspection fees into your offer.

Create a detailed renovation budget. Map out every project and get accurate quotes from contractors. Pad estimates for contingencies.

Look for hidden issues. Check for mold, drainage problems, foundation cracks, and roof or septic condition. Probe any areas of concern.

Factor in delays. Build extra time into timelines in case projects run long. You don’t want to end up paying rent longer than expected.

Choose the right professionals. Vet GCs thoroughly through reviews and references. Ensure subs are licensed and reputable.

Maintain financial reserves. Having extra savings is crucial to cover unexpected overages during work.

Understand program guidelines. Follow all mortgage rules, draw request processes, and inspection requirements.

With careful planning and realistic expectations, your first fixer home can be a great investment. But make sure you assess the work ahead of time and budget properly.

Is a Fixer-Upper Right for You?

While rewarding, renovating a home as a first-time buyer isn’t easy. Be honest with yourself before committing to a major fixer project:

• Do you understand the costs, effort, and delays involved?
• Do you have enough saved to cover inevitable budget overages?
• Are you prepared to take time off work for renovations if needed?
• Can you manage living in a chaotic construction zone?
• Will you use licensed contractors as required by lenders?

If you’re still feeling unsure, you may want to start with more minor cosmetic repairs and work your way up to a full renovation. Take time to save more for your project so you have financial wiggle room.

And if you ultimately realize a fixer-upper isn’t a good fit right now, that’s okay too! As a first-time buyer, choose the option you feel most comfortable with, whether that’s a move-in ready home or one needing light repairs only. You’ll gain experience for the future.