Buying Your First Home That Needs Work? Everything You Need to Know About First-Time Home Buyer Fixer-Upper Loans

A fixer-upper loan may be a good option to buy a house that needs some TLC and pay for the repairs needed to turn it into your dream home. These loans are designed to give you the money you need to buy and renovate the home at the same time. Understanding how the different fixer-upper loans work will help you decide the best way to finance your fixer-upper.

Fixer-upper loans — also commonly known as renovation loans — are mortgages that typically offer you enough money to buy a new home and roll in the repair costs based on how much it’s expected to be worth after the renovation. Each fixer-upper loan program comes with its own qualification rules.

So you’re a first-time home buyer looking to get more house for your money by purchasing a fixer-upper With home prices sky high, buying a home that needs some TLC can be a smart move to afford your dream home or neighborhood But where do you start when it comes to financing renovations as a first-time buyer? Here’s what every newbie homeowner should know about first-time home buyer fixer-upper loans.

What is a Fixer-Upper Loan?

A fixer-upper loan allows you to roll the purchase price of the home plus renovation costs into a single mortgage. Rather than taking out a traditional mortgage and then scrambling to pay for upgrades out of pocket, you can pay for everything upfront and simply make one monthly payment.

These special mortgages for home improvements make fixer-uppers more accessible to first-time buyers who may not have tens of thousands socked away for renovations They also allow you to finance upgrades at a much lower interest rate than alternatives like credit cards or personal loans

FHA 203(k) Loan

One of the most popular fixer-upper loans for first-time buyers is the FHA 203(k). Offered by the Federal Housing Administration (FHA), these government-backed loans are more flexible than conventional mortgages in terms of credit score and down payment requirements.

With an FHA 203(k), you can qualify with a credit score as low as 580 and down payment as low as 3.5%. For context, many conventional mortgages require a 620 credit score and 20% down. This makes 203(k) loans ideal for buyers with less-than-perfect credit or savings.

You can finance up to $35,000 in renovations with a basic 203(k) or up to $85,000 with a higher-priced version of the loan. The FHA 203(k) calculator can help you estimate your mortgage payment.

Fannie Mae HomeStyle Loan

If you don’t qualify for an FHA loan, Fannie Mae’s HomeStyle mortgage is another option. HomeStyle loans require higher credit scores starting around 620, and at least 5% down.

But the major perk of HomeStyle loans is flexibility. You can use the funds to make any home improvements, even luxuries like a swimming pool that 203(k) loans don’t allow. HomeStyle also lets you act as your own contractor instead of being forced to use an FHA-approved contractor.

One downside is that HomeStyle renovation mortgages have stricter appraisal requirements post-renovation to ensure the work actually increased the home’s value.

Freddie Mac CHOICERenovation Loan

Similar to HomeStyle, Freddie Mac’s CHOICERenovation mortgage requires just 5% down and a minimum 620 credit score. It can be used to finance unlimited types of renovations up to 75% of the home’s value.

CHOICERenovation stands out for its unique “no-escrow” option. This lets you manage contractor payments yourself rather than being forced to use an escrow account.

VA Renovation Loan

If you’re eligible for a VA home loan as a servicemember or veteran, you can also get a VA renovation loan to buy and rehab a home in one fell swoop.

The big caveat is that VA renovation loans can be tough to find and come with more strings attached. You must use a VA-approved contractor and complete all work within four months of closing. Projects are also more restricted than other renovation loans.

Still, VA home loans offer zero down payment and flexible credit score requirements, perks that make the headache of finding a VA renovation loan worth it for some veteran and military buyers.

Tips for First-Timers Applying for Fixer-Upper Loans

If you’ve decided a renovation loan is the right call for your fixer-upper home purchase, here are a few tips to make the financing process smoother:

Shop around for lenders: Don’t just go with the first lender you talk to. Compare multiple mortgage lenders to find the best rates and loan options. Online lenders like NBKC Bank and LoanDepot offer fixer loans with fast approvals.
Get contractor cost estimates: Lenders require a detailed contractor bid to approve renovation work. Shop around for quotes to find the best deal.
Factor in contingency funds: Renovation costs often end up higher than initial estimates. Pad the loan amount by 10-20% for unexpected overages.
Consider a 203(k) consultant: Even if you don’t go with an FHA 203(k) loan, hiring a 203(k) consultant for their renovation expertise can be helpful for first-timers.
Start renovations quickly: Lenders impose deadlines for starting and completing projects, often 30-90 days from closing. Have your contractor lined up and ready to hit the ground running.
Inspect the property thoroughly: First-time buyers are often so eager to snag a deal that they overlook major issues. Inspect both home and loan carefully.

Alternatives to Fixer-Upper Loans

Fixer-upper mortgages aren’t your only option as a first-time home buyer. Here are a few alternatives to consider:

Home Equity Loan or HELOC: If you buy a home needing minimal updates, a home equity loan or line of credit to fund renovations later on may work. You’ll need existing equity for approval though.

Cash-Out Refinance: Similarly, you could do small renovations first, then cash-out refinance to pull equity for more significant upgrades down the road.

Buy a Turnkey Home: Plenty of homes hit the market move-in ready, if you want to avoid repairs entirely as a first-time buyer. Explore turnkey options if you’re tight on time or skills.

Personal Loan: For minor cosmetic fixes, consider a personal loan. While interest rates are higher than mortgages, loan amounts as low as $1,000 can help fund small home projects.

Key Takeaways on First-Time Home Buyer Fixer-Upper Loans

While buying a fixer-upper can score you a deal, first-time buyers should weigh the pros and cons carefully before using a renovation loan. Do you have the skills, time, and patience for DIY repairs? How will you furnish the home if you have to vacate during construction? Are you ready to deal with the headaches of contractors and inspections?

If you answer yes, a fixer-upper loan can be a great way to maximize your buying power and afford your dream home as a first-time buyer. Just be sure to inspect the property thoroughly, vet your contractor, and build in a financial cushion before taking the fixer-upper plunge!

Put together a renovation plan

Many renovation loan programs require you to provide a construction plan for mortgage approval. This will usually include a construction cost breakdown and a contract between you and a licensed contractor to supervise the work until it’s finished. Programs like the FHA 203(k) may also require an inspection from the Department of Housing and Urban Development (HUD) to make sure the project meets government guidelines.

Check your budget

You may not be able to move into your home right away, so make sure you have extra room in your budget for unexpected expenses. This includes setting aside money for a temporary rental or higher-than-expected repair costs. Make sure you budget for closing costs and reserves — you may need to have extra cash in the bank to cover payments while the home is being built, as well as a reserve to cover higher-than-expected renovation costs.

FIXER UPPPER – FHA 203K Rehab Loan | LESSONS LEARNED

FAQ

What is an FHA 203k loan?

Limited 203(k) Mortgage Permits homebuyers and homeowners to finance up to $35,000 into their mortgage to repair, improve, or upgrade their home. Homebuyers and homeowners can quickly and easily tap into cash to pay for property repairs or improvements, such as those identified by a home inspector or an FHA appraiser.

Can you use an FHA loan to renovate?

If you’re taking on a renovation project that involves major structural work, the standard FHA 203(k) loan is for you. It has a minimum required draw of at least $5,000. A standard 203(k) loan can even be used for a full demolition and reconstruction, so long as the original foundation stays in place.

Can repairs be included in an FHA loan?

Some of the most common problems include: Repairs: FHA appraisals may note repairs that must be made before the loan can go forward. When this happens, the house is conditionally approved, and the appraiser notes what the market value will be after the repairs.

Can a first-time home buyer buy a fixer-upper?

For many first-time home buyers purchasing a fixer-upper, an all-in-one rehabilitation loan is a great option. Once you’ve settled on the loan you want, get preapproved. Preapproval letters are only valid for a limited period (often 30-90 days), but you can renew them as often as necessary. Always keep yours up to date while house hunting.

Should you get a fixer-upper loan?

Should you buy a fixer-upper or a renovation mortgage?

If you’ve decided to buy a diamond in the rough, a renovation mortgage may be the right home financing option for your needs. Many fixer-uppers are sold to investors who pay in cash, renovate the home and sell it for a profit – but DIY-savvy homebuyers also have options for financing fixer-upper homes.

How do I pay for a fixer-upper?

Borrow a conventional loan to cover the purchase of the home. Note that 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.