How to Buy a Fixer Upper Home With a Loan

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.

Fixer upper homes can be an affordable way to get into homeownership and build equity through sweat equity. While fixer uppers often sell for below market value financing these types of homes can be tricky. In this comprehensive guide we’ll cover everything you need to know about getting a loan for a fixer upper, including different loan programs, costs to factor in, lending criteria, and tips for success.

What is a Fixer Upper Home?

A fixer upper is a home that needs significant repairs and renovations in order to be brought up to standard condition Some common issues with fixer uppers include

Deferred maintenance and repairs – roofs, siding, plumbing, electrical, HVAC
Functional obsolescence – outdated kitchens, bathrooms
Cosmetic fixes – flooring, paint, landscaping
Additions or expansions needed – extra bedroom, bathroom

While fixer uppers require major work, their lower asking prices can make them attractive, especially in expensive housing markets The tradeoff is you have to invest time and money into repairs in exchange for the lower purchase price

Loan Options for Fixer Uppers

It is possible to finance a fixer upper home through several different loan programs:

FHA 203(k) Loan

Government-backed mortgage for fixer uppers
Loan amount covers both purchase + rehab costs
Up to $35,000 in fixes for streamline 203(k)
Over $35,000 in repairs requres standard 203(k)

FHA 203(h) Loan

For purchasing and repairing homes in disaster areas
Covers purchase price + repairs up to area median
Up to $223,375 limit in most U.S. counties

USDA Renovation Loan

For fixer uppers in rural areas
Offsets costs to repair, modernize or remove health hazards
Home must be over 20 years old and funds limited to $50,000

VA Renovation Loan

Allows veterans to buy and renovate in one VA loan
Lender will escrow funds for renovations
Home must be owner-occupied

Conventional Renovation Loan

Offered by private lenders like banks and credit unions
Have higher credit standards than government loans
Require detailed renovation plans and contractors

Government-backed loans like FHA, USDA and VA allow for the most flexibility, lowest costs, and easiest approval for fixer uppers. Conventional lending guidelines are more stringent.

Fixer Upper Loan Costs

When budgeting for a fixer upper, you’ll need to factor in these common fees and expenses:

Downpayment – Expect to put 10-20% down for most fixer upper loans. This helps account for the risk.

Mortgage Rate – Will usually be slightly higher than rates for standard homes.

Rehab Costs – For materials, contractors, supplies for all planned improvements.

Appraisal – As-is value and after improved value are assessed.

Inspection – Identifies all repairs needed beyond just cosmetics.

Permits – Will be required for most structural renovations.

Contingency Fund – 10-20% of rehab costs for unexpected overages.

Carrying Costs – For mortgage, taxes, insurance during renovation period.

Relocation – Temporary housing if home will be uninhabitable during work.

Fixer upper buyers should budget for at least 20-30% above the purchase price to account for all renovation expenses and fees.

Fixer Upper Loan Eligibility

When applying for a loan to finance a fixer upper, there are a few key criteria lenders will evaluate:

Credit Score – A minimum score in the 620 range is common, but higher is better. Shows you can manage debt responsibly.

Income – Must have enough stable income to cover the mortgage payment, even during renovations.

Assets – Large amount of liquid reserves is preferred to cover downpayment, rehab costs, contingency funds.

Scope of Work – Lender will evaluate the feasibility, costs and timelines for all planned renovations.

Contractor Approval – Licensed, bonded, insured contractors must be used on most loans.

Rehab Budget – Improvement costs and quotes must seem reasonable and well-documented.

After Repaired Value – ARV needs to support the loan amount after all renovations are complete.

Loan-to-Value – Total loan amount compared to the future home value is important.

Coming to the table with a strong financial profile and detailed renovation plans will go a long way toward getting approved.

Tips for Getting a Fixer Upper Loan

If you want to successfully finance a fixer upper home, here are some helpful tips:

Shop different loan programs – Compare FHA 203(k), VA, USDA, conventional loans for the best fit.
Get preapproved – Having a preapproval letter in hand shows sellers you can move quickly.
Know your budget – Factor in downpayment, all repairs, fees and contingencies.
Assess scope of work – Understand all issues that need addressing beyond cosmetics.
Interview contractors – Find licensed pros experienced with renovations.
Buffer rehab timeline – Build in cushion in case projects take longer than expected.
Consult professionals – Work with real estate agent, lender, inspector, contractors.
Review HOA rules – Make sure community allows planned exterior renovations.
Have financing contingency – In case you need to back out if loan is denied.
Document everything – Keep detailed records of all rehab costs and timelines.

Doing your due diligence upfront will help ensure your fixer upper loan goes as smoothly as possible.

Steps in the Fixer Upper Loan Process

If you’ve found a fixer upper home you want to purchase with financing, here’s an overview of the typical process:

Initial loan consultation with lender
Submit loan application and documents
Provide renovation plans, quotes, ARV to lender
Lender reviews financials, scope of work
Receive preliminary loan approval
Make offer with financing contingency
Conduct inspections of home
Finalize contractor bids and rehab budget
Obtain appraisal showing as-is and after-improved value
Receive final loan approval and get clear to close
Close on loan, receive funds
Begin repairs and renovations
Oversee contractors during all work
Submit progress payment requests to lender
Complete renovations
Pass final inspection showing completion
Receive certificate of occupancy
Relocate into renovated home

The exact timeline varies, but expect the process to take 2-4 months with a fixer upper as there are additional steps and approvals required.

Potential Pitfalls With Fixer Upper Loans

While financing a fixer upper can allow you to get a great deal on a home, there are hazards to watch out for:

Rehab costs spiraling above budget
Shoddy contractor work requiring redo
Discovering major hidden issues once renovations begin
Timeline delays derailing plans and increasing costs
As-completed value coming in lower than expected
Having to dip into personal funds if loan amount falls short

To mitigate risks, be conservative with budgets, choose contractors carefully, build in contingencies, and closely oversee all work.

The Bottom Line

Fixer upper homes allow buyers to get into homeownership at an affordable price point through sweat equity. While financing these homes takes some extra steps, buyer-friendly loan programs like FHA 203(k), VA, and USDA can make it possible. Just make sure you budget carefully, find experienced contractors, and have some renovation expertise on your team. With proper planning and reasonable expectations, you can turn that diamond in the rough into a beautiful home.

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.

Fannie Mae HomeStyle renovation loan

The Fannie Mae HomeStyle® Renovation loan allows you to borrow up to 97% of the cost of buying and fixing up your home, which means you may only need a 3% down payment. Your loan amount is based on the cost of the renovation plus your purchase price or the expected value of your home after it’s renovated.

You can use the HomeStyle loan to cover the cost of everything from needed repairs and energy upgrades to luxury items and custom landscaping. An added bonus: You’ll qualify up to the conforming loan limits, giving you more borrowing power than the lower loan limits set on government fix-up products. You can choose a fixed-rate 30-year or 15-year term, or an adjustable-rate mortgage (ARM) option, and need a minimum credit score of 620 to qualify.

FIXER UPPPER – FHA 203K Rehab Loan | LESSONS LEARNED

FAQ

What are fixer-upper loans called?

Renovation mortgages allow you to purchase a fixer-upper and roll construction costs into the loan amount. Depending on the type of loan, there may be rules limiting the scope of projects you can finance – such as no luxury additions or rebuilds – and you may need to use an approved contractor.

What are the risks of buying a fixer-upper?

Unexpected Costs. The main risks when buying a fixer-upper is the potential for unforeseen costs. Even if you think you’ve done your due diligence, there can be hidden problems that aren’t immediately apparent at first glance, like mold, water damage or structural issues.

Can USDA loan be used on fixer-upper?

Can I buy a fixer-upper with a USDA loan? Yes, you can use a USDA loan to buy a fixer-upper, but there are rules. The estimated renovation cost can’t be more than 10% of your loan amount. The home must also be in livable condition.

Is it a good idea to get a fixer-upper?

A fixer-upper may be a good investment, but it can also be a huge money pit if you estimate renovations incorrectly, contract out for most projects and skip an inspection. To ensure a fixer-upper house is well worth the money, look at comparable homes (known as real estate comps) in the neighborhood.

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.

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.

Should you buy a fixer-upper home?

Fixer-upper homes often look more attractive in a hot housing market. Their prices are typically lower and there may be less competition from other buyers. Check your fixer-upper home loan options. Start here In this guide, we share pointers to help you find, buy, and finance a fixer-upper property.