How To Buy A Fixer-Upper Home With A Loan

Purchasing a fixer-upper can be a great way to get into homeownership for a lower price. But financing the purchase and renovations can get tricky. Here’s a step-by-step guide to buying a fixer-upper with a loan.

What Is A Fixer-Upper?

A fixer-upper is a home that needs significant repairs, upgrades or renovations to restore it to good condition Fixer-uppers are often old, neglected properties or foreclosures They may have outdated kitchens and bathrooms, worn floors and carpets, peeling paint or other cosmetic issues. Or they could have more serious problems like roof leaks, faulty plumbing or electrical systems, foundation cracks, pest damage or structural issues.

The key is that fixer-uppers have redevelopment potential if you’re willing to put in some “sweat equity.” With renovations and repairs, the home can increase substantially in value. Many homebuyers like myself are willing to take on a fixer-upper project in order to get into homeownership.

Why Buy A Fixer-Upper?

Here are some of the main motivations for buying a fixer-upper property

• Lower purchase price – Fixer-uppers often sell for 10-25% less than comparable move-in ready homes. This helps first-time buyers get into ownership.

• Create your own home – You can customize the layout, design and features to suit your tastes.

• Build equity – Value can increase significantly by improving the home. Equity builds as mortgage principal is paid down.

• Pride of ownership – It’s satisfying to transform an outdated house into your beautiful dream home.

Challenges Of Fixer-Uppers

However, buying a home that needs major renovations also comes with some key challenges:

• Hidden defects – Unknown issues like structural damage or pest infestations can be uncovered, blowing budgets and timelines. Careful inspections are critical before buying.

• Permitting – Many repairs require getting building permits and inspections before and after work. This adds time and costs.

• Contractor issues – Cost overruns, shoddy workmanship and delays are common pain points when hiring contractors. Vet them carefully.

• DIY limitations – Lenders often limit the amount of work buyers can do themselves. Critical structural and mechanical work typically requires licensed pros.

Finding Fixer-Uppers

The first step is identifying potential fixer-upper opportunities. Here are some tips:

• Search real estate listings for homes advertised as “handyman specials” or “needs TLC.”

• Look for homes priced below neighborhood averages to account for their condition.

• Check foreclosure and auction listings – distressed properties are often neglected and in disrepair.

• Drive or walk around neighborhoods looking for vacant, dilapidated houses with signs of disrepair.

• Connect with a real estate agent who specializes in listing fixer-uppers. They’ll know of listings before they hit the general market.

• Look for unpermitted home additions that may need to be removed or properly permitted.

Getting Preapproved For A Fixer-Upper Loan

Once you find a potential fixer-upper home you want to purchase, the next step is getting preapproved for financing.

Special rehabilitation loans, also called renovation loans or fixer-upper loans, let you roll the purchase price and improvement costs into one mortgage. This avoids having separate purchase and renovation loans.

Popular fixer-upper loan programs include:

• FHA 203(k) – Allows financing of purchase + renovations with just 3.5% down payment.

• Fannie Mae HomeStyle – Conventional loan with minimum 3% down for purchase and repairs.

• VA Renovation – 100% financing for veterans, including rehab costs.

• USDA Renovation – 100% financing for low-income buyers in rural areas, covering repairs.

Work with a lender to select the best loan program and get preapproved before making an offer. Preapproval letters show sellers you’re serious.

Making An Offer On A Fixer-Upper

When you find a fixer-upper you want to purchase, it’s time to make an offer. Some tips:

• Make sure your offer is contingent on a professional home inspection to uncover any major unforeseen issues. Don’t skip this, even if it’s a hot market.

• Be conservative in your renovation budget estimates. Unplanned costs inevitably come up during projects.

• Write in contingencies for financing, appraisal, termite inspection, permitting, and other key items. This protects you if issues arise.

• Submit your preapproval letter with the offer to show you’re financially qualified and can close on time.

• If multiple offers come in, sweeten yours with an escalation clause or shortened feasibility/inspection period. But don’t waive contingencies altogether.

Home Inspections

Once your offer is accepted, move forward with inspections as allowed in your contract. Be sure to get:

• General home inspection – Identify defects like roof leaks, foundation cracks, faulty electrical, bad plumbing, HVAC issues, etc.

• Termite inspection – Check for hidden wood damage, which can be extremely costly to repair.

• Lead-based paint tests – Required in homes built before 1978 to protect your family from lead poisoning hazards.

• Title search – Confirm there are no liens, claims or other title issues on the property.

Thorough inspections protect you from making a bad investment and help you budget for repairs.

Selecting Contractors

Most fixer-upper loans require you to use a licensed general contractor to complete at least some of the renovation work. Be sure to:

• Get multiple bids from contractors – don’t just go with the lowest bid.

• Vet them thoroughly – ask for references from past customers and samples of their work.

• Check license status and complaints.

• Get everything in a detailed written contract – cost, timeline, permits, clean up, contingencies for overruns, etc.

This protects you from shoddy work or fly-by-night contractors.

Closing On The Purchase

During the closing process, you’ll sign final loan documents and the fixer-upper will become yours! Be sure you understand when renovation funds will be dispersed to you or contractors. There is often an initial draw at closing with subsequent draws as work is completed in phases.

Plan your renovations, permitting, and contractor hiring so that work can begin promptly after closing. You don’t want to leave the home vacant and unprotected for long.

Completing Renovations

Once you close and take ownership, contractors can start renovations per the agreed contract and timeline. As a fixer-upper homeowner, you’ll need to:

• Oversee contractors closely – inspect work before approving draw payments

• Obtain all necessary permits and inspections for the project

• Stick to your scope and budget as much as possible – change orders get expensive

• Live elsewhere if home is uninhabitable during construction

• Pay contractors from the renovation funds you received at closing

With constant supervision and diligent project management, you can turn your fixer-upper into the home of your dreams!

The Fixer-Upper Payoff

When all renovations are complete, you’ll hopefully have a beautiful, updated home customized to your tastes! Other benefits include:

• Increased home value – Fixer-uppers gain instant equity through renovations

• Lower mortgage payment – One mortgage vs. separate purchase + reno loans

• Cost savings – Fixer-uppers list for less than comparable updated homes

• Pride in ownership – Personally improving a rundown property is very rewarding