Taking Out a Loan to Fix Up Your Fixer Upper House

Purchasing a fixer upper house can be an exciting way to get your dream home at a lower price point. However, buying a home that needs work also requires having the funds to renovate it. That’s where fixer upper loans come into play. These specialty mortgages give borrowers the financing they need to both buy and repair a home that needs some TLC.

I’ll walk through what exactly a fixer upper mortgage is, the different types available, and things to consider before taking out one of these unique loans. By the end, you’ll understand if this kind of financing is right for your fixer upper endeavor.

What Is a Fixer Upper Loan?

A fixer upper loan, also known as a renovation loan, provides funds to purchase a home in need of repairs as well as money to cover the costs of those repairs. Essentially, these loans roll the mortgage and renovation expenses into a single loan. This means you only need to complete one loan application and deal with one closing.

With a fixer upper mortgage, the lender determines the maximum they’ll loan by looking at two factors:

• The purchase price of the home
• The estimated cost of renovations

They will approve you for the lower of either the purchase price plus renovation costs or the expected appraised value once the home is updated.

Fixer upper loans typically require a minimum down payment of around 3-10% The specific down payment depends on the loan program. The benefit of these mortgages is they allow borrowers to turn a home needing extensive repairs into their dream house without having to take out multiple loans

Types of Fixer Upper Loans

There are several loan programs designed specifically for financing fixer upper homes Here are some of the most common types

Fannie Mae HomeStyle Renovation Loan

This loan guarantees mortgages for purchases and renovations on single family homes. The maximum loan amount is up to 97% of the home’s value after renovations. That means you may only need a 3% down payment. HomeStyle loans can be used for repairs, upgrades or even luxury improvements.

To qualify you’ll need a minimum 620 credit score. The HomeStyle program offers fixed and adjustable rate mortgages.

Freddie Mac CHOICERenovation

Similar to Fannie Mae, Freddie Mac offers CHOICERenovation loans that cover buying and repairing up to 97% of a home’s value. Renovations must be completed within 12 months. Applicants need a 620 minimum credit score.

Freddie Mac also offers CHOICEReno eXPress for small renovation projects up to 15% of the home’s value. These have quicker 180 day timeline.

FHA 203(k) Loan

This government-backed mortgage under the Federal Housing Administration insures loans that combine purchasing and fixing up a home. The FHA 203(k) allows more flexibility, including financing full tear downs.

Minimum credit scores start at 500 and down payments can be as low as 3.5%. There are also no income limits.

VA Renovation Loan

The Department of Veterans Affairs guarantees renovation loans with no down payment for eligible service members. VA loans look at your whole financial picture rather than requiring a certain credit score. These can finance renovations up to 100% of the future home value.

USDA Renovation Loan

For low-income buyers in rural areas, the USDA backs no down payment renovation loans. These have income caps and finance up to 100% of the value after repairs. USDA loans are ideal for essential home improvements.

As you can see, there are lots of possibilities when it comes to financing the purchase and renovation of a fixer upper home. Be sure to review your options to find the best loan for your situation.

Tips for Applying for a Fixer Upper Loan

When applying for a fixer upper mortgage, follow these tips:

• Shop around – Compare quotes from multiple lenders experienced with renovation loans. Rates and fees can vary.

• Know the costs – Have repair estimates handy when applying so the lender can factor in these expenses. Be prepared for unexpected costs too.

• Build in a buffer – Add a 10-20% cushion to your renovation budget for cost overruns.

• Hire a contractor – Lenders want to see you’ll have help managing the construction work.

• Get appraisal – The home appraisal ensures you don’t borrow more than it will be worth.

• Read the fine print – Understand the loan’s specific rules, timeline and draw requirements.

Taking the time upfront to prepare will make your application process smoother.

The Pros and Cons of Fixer Upper Loans

As with any loan product, fixer upper mortgages come with both advantages and drawbacks. Consider these when deciding if this type of financing fits your renovation plans:

Pros

• One loan for purchase + renovations
• Finance up to 97% of home value
• Customize your dream home
• Potentially build equity faster

Cons

• Higher costs if repairs go over budget
• Can’t immediately move into home
• Managing contractors complicates project
• More complex loan process

For buyers willing to take on some risk and effort, the pros may outweigh the cons. But carefully evaluate both before committing to this type of mortgage.

Alternatives to Fixer Upper Loans

While handy, fixer upper loans aren’t your only option for financing home renovations. Other possibilities include:

• Personal loans – Unsecured loans from a bank or credit union

• Home equity loan – Secured debt using your home’s equity

• Cash-out refinance – Refinancing your mortgage and taking cash to renovate

• 401(k) or IRA loan – Borrowing from your retirement savings

• HELOC – Revolving home equity line of credit

• Credit cards – Charging renovations but paying higher interest

• Seller financing – Having the seller finance part of the renovations

• Cash savings – Paying for improvements out of pocket

Evaluate if any of these might work better for you than a specialized fixer upper mortgage.

Should You Buy a Fixer Upper?

Deciding if a fixer upper is right for you depends on:

• Your renovation budget
• How soon you want to move in
• Your ability to oversee contractors
• Your home improvement experience

Buying a home needing repairs makes the most sense if you have cash set aside for renovations, time before you need to move, and knowledge about the fix-up process.

If that’s not the case, you may be better off looking for a home already renovated so you can move in immediately. However, with the right planning and financing, fixer uppers can be rewarding.

The Bottom Line