Loans for Fixer Upper Homes: Financing Options to Restore Your Dream Home

Purchasing a fixer upper home can be an exciting way to get your dream house at a discount. With some elbow grease and smart renovations, you can transform a dated or damaged home into a beautiful, customized abode. But buying and renovating a fixer upper also requires extra capital. If you don’t have tens of thousands in cash saved up, how can you finance the purchase and repairs? Thankfully, several loan programs exist specifically to help buyers afford fixer uppers.

What is a Fixer Upper Home?

A fixer upper refers to a home that needs moderate to major repairs and updates in order to be restored to good condition. Fixer uppers are often priced below market value to account for the amount of work required.

Common issues with fixer uppers include:

• Outdated or damaged finishes like flooring, cabinets, countertops
• Faulty electrical, plumbing, roofing, HVAC systems
• Neglected repairs and lack of maintenance
• Bad layouts or dysfunctional spaces
• Unsightly or overgrown landscaping

Cosmetic fixes like painting, replacing fixtures, and updating flooring are generally straightforward DIY projects. But major structural and mechanical issues require professional contractors.

The costs add up quickly. Expect to spend 10-25% or more of the home’s purchase price on renovations Securing financing for both the home purchase and repairs is crucial when buying a fixer upper.

Benefits of Buying a Fixer Upper

Taking on a fixer upper project allows buyers to:

• Purchase a home below market value – Fixer uppers often sell for 10-25% less than comparable updated homes This discounts the purchase price to account for needed renovations,

• Customize the property – You can tailor the home’s layout, finishes, and features to match your tastes during the renovation process.

• Build equity – Completing renovations adds instant equity by boosting the home’s value. Flippers can earn a tidy profit

• Gain hands-on experience – First-time homebuyers can learn DIY skills and work directly with contractors to oversee home projects.

• Invest in the community – Upgrading worn and neglected properties improves home values and the neighborhood as a whole.

Types of Renovation Loans

Several loan programs exist to finance both the purchase and rehab of a fixer upper. Here are some of the most common options:

FHA 203(k) Loan

FHA 203(k) loans allow buyers to roll the purchase price and renovation costs into a single mortgage insured by the Federal Housing Administration. Two versions exist:

• Standard 203(k) – Finance repairs up to $35,000. Requires hiring a HUD consultant to approve plans and oversee the work.

• Streamlined 203(k) – Finance repairs up to $35,000. Does not require a consultant but has stricter requirements regarding the types of eligible repairs. Best for minor or cosmetic fixes.

Fannie Mae HomeStyle Loan

The HomeStyle loan finances purchase and renovations in one mortgage. Buyers can perform major structural renovations like adding rooms. HomeStyle does not impose a maximum renovation amount.

Freddie Mac CHOICERenovation® Loan

Similar to Fannie Mae’s HomeStyle loan, the CHOICERenovation product offers flexible financing for purchase and repairs via a single mortgage. No renovation dollar limits exist.

Reform Mortgages

Reform mortgages are a relatively new loan product marketed specifically to buyers of fixer uppers and other homes requiring repairs. Two top lenders offering these loans are:

• Landed – Reform loans from Landed finance both the purchase and planned renovations in a single loan. Specific repair funds are set aside in an escrow account.

• Homewise – Homewise offers reform mortgages that combine home purchasing with renovation financing and project management support.

Reform loans aim to make financing fixer uppers a smoother, more guided process for borrowers.

What Banks Offer Renovation Loans?

Many national lenders offer some version of a renovation loan, including:

• Wells Fargo – Renovation mortgage
• Bank of America – Renovation mortgage
• Chase – Jumbo and conventional renovation loans
• U.S. Bank – 203(k) and HomeStyle renovation loans
• Guild Mortgage – HomeStyle and 203(k) loans

Regional and local banks, credit unions, and mortgage brokers also provide rehab loans. Working with a knowledgeable loan officer familiar with home remodels is key.

Tips for Securing Financing

When applying for a fixer upper loan, keep these tips in mind:

• Get pre-qualified – This helps you set a realistic renovation budget and home search. Shop mortgages once you’re under contract.

• Know your credit/income requirements – Each loan program has minimum score and income requirements. This ranges from 500 for FHA products up to 620 or higher for conventional mortgages.

• Research renovation costs – Accurately estimate project expenses and build in a 10-15% contingency buffer.

• Assess major structural issues – Be realistic about foundation, electrical, plumbing, and roof repairs needed. These drastically increase costs.

• Consider doing some work yourself – Sweat equity can help offset renovation expenses. But know your DIY limits, as some repairs require pros.

• Ask about contingency reserves – Some lenders set aside extra funds in case project costs exceed estimates. This provides a buffer.

• Compare multiple lenders – Shop around for the best rates and loan fees. Look for renovation loan experience.

The Loan Process for a Fixer Upper Purchase

Buying a fixer with financing involves a different sequence of events versus a typical purchase:

1. Find the property – Identify a suitable fixer upper home to purchase. Review inspection reports to estimate repair costs.

2. Apply for loan pre-approval – Get pre-approved for a renovation loan based on the projected purchase price plus estimated rehab budget.

3. Make an offer and negotiate terms – Submit a competitive offer and negotiate any repairs the seller will cover.

4. Complete renovations plan – Work with contractors to detail all repairs and upgrades to be completed along with accurate cost estimates.

5. Finalize renovation loan – Provide the itemized renovation plan and budgets to your lender when applying for formal mortgage approval.

6. Close on the loan – Loan funds pay for both the home purchase and the agreed-upon repairs. Renovation funds are escrowed until the work is completed.

7. Complete renovations – Proceed through the rehab process with progress inspections from your lender to release escrowed payments.

8. Mortgage payments begin – Once all repairs are finished, escrow funds depleted, and inspections passed, you begin making regular mortgage payments.

Is a Fixer Upper Right For You?

Before hunting for a home needing TLC, reflect on your skills, resources and risk appetite. Major renovations require:

• Adequate savings and income
• Strong credit and debt-to-income ratios
• Contracting expertise or the willingness to learn
• Patience to endure the reno process
• Tolerance for living in a construction zone
• Flexibility when inevitable delays and issues occur

With proper planning, perseverance, and TLC, your dream home could be a fixer upper waiting to be transformed. The right financing helps turn that vision into reality.