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Fixer upper loans offer buyers access to housing opportunities they may otherwise miss out on. Purchasing a house that isn’t in an ideal condition can lower the competition of house buying, get you a lower price, and even improve your ability to raise your home’s value quickly. There are many financing options to help pay for construction and renovation project costs. However, borrowers should beware of construction loans that may have high-interest rates and fees.

What Exactly Do Fixer-Upper Loans Do?

These loans are financing options that cover the purchase price of a home with funds for home renovations built into them. They are a great alternative to other types of financing options because they don’t require you to have equity in your home to borrow. Building equity takes time, so if you’re moving into a house that needs renovations completed immediately, you need a fixer-upper loan.

Benefits of Fixer-Upper Loans

Buying a house is hard, especially if your financial situation means you aren’t considered an “ideal buyer.” Even if you are an ideal buyer and you’re trying to purchase property in a hot neighborhood, home buying can get competitive. Oftentimes, homes that need renovations hit the market at a lower price point and draw less buyer attention.

This means it can be easier to get your offer seen and accepted by the seller. Fixer-upper loans offer the opportunity to skip buying a house that’s out of your price range just to get into the neighborhood you love.

Fixer-upper loans also let you quickly raise the value of your home because you aren’t just waiting for time and the market to affect the value. By actively investing in your house through renovations, you’ll see its value rise.

Renovations also allow you to create a home that’s tailor-made to your style and needs without going through the time and expense of building a home from scratch. This is another benefit fixer-upper loans offer: the power to customize.

Types of Fixer-Upper Loans

There are two main types of fixer-upper loans to choose from. They each have different financial and construction requirements. Before you choose a fixer-upper loan, it’s a good idea to know your credit score and how much you can afford to put down on a house.

The FHA 203(k) mortgage and the Fannie Mae HomeStyle Renovation Loans

These mortgages are both government-funded loans that are tailored towards helping people buy and fix up homes. When you consider which loan to use, think about your finances, the types of repairs you’ll need to do, and your long-term goals for your house.

FHA 203(k) Mortgage Details

The requirements for an FHA 203(k) mortgage are the following:

  • Must be used on an older and/or damaged home
  • Financed improvements must become permanent parts of the property
  • Improvements must be necessary to the structure and value of the home
  • A credit score of at least 580
  • 3.5% down payment on the home’s value after planned renovations
  • The home has to be for you to live in (rather than to fix up and resell)

A home loan amount will be determined by how much the house is worth. In the case of an FHA 203(k) mortgage, the loan value can be up to 110% of the home’s predicted post-renovation-value or the current price of the home with the addition of what you’ll have to pay in repairs.

FHA 203(k) loans can be used to refinance your home if you’re doing major repairs, which is why the value of the loan can be calculated in both of those ways. Whichever calculates to be the lesser amount is how much you can borrow in the loan.

There’s a smaller-scale option with the FHA program that can help cover renovations that don’t require any major construction. These usually include carpet replacements or renovations of single rooms like a kitchen or bathroom. This option is called the limited 203(k) mortgage, and it caps out at $31,000 (with $5,000 held in reserve in case the work goes over the estimated cost).

The FHA 203(k) mortgage program is great if you want to get into a neighborhood where houses are out of your price range. With such a low down payment requirement this fixer-upper loan could offer you a path into homeownership.

Fannie Mae HomeStyle Renovation Mortgage Details

HomeStyle mortgages offer more flexible financing in terms of what the mortgage can be used for. However, qualifying for this type of fixer-upper loan is more difficult than an FHA loan. This loan’s requirements include the following:

  • A 5% down payment
  • A credit score of 680 (or more depending on your debt-to-income ratio)
  • Renovation completion within 12 monthsImprovements must be for permanent parts of the home

HomeStyle loans don’t carry the requirement of use for a home you’re planning to live in. If you want to invest in a home to flip it and resell, you can use a HomeStyle mortgage. This type of financing allows you to borrow up to 75% of the purchase price plus the renovation costs or 100% of the predicted home value after renovations are complete.

No matter what has you dreaming about a home renovation, a fixer-upper loan can help you achieve your real estate goals. Choosing a fixer-upper loan can feel overwhelming. A good lender who offers construction and renovation loans will be able to help you pick the best option for your needs.

If you can see yourself taking on a fun project home, give us a call. We are the specialists in thinking outside the box and finding financing that fits every client’s needs.