Buying and Financing a Fixer-Upper
Buying a fixer-upper is popular among home buyers who want to take advantage of a low-priced home in a great location. There are some creative options when financing a fixer upper to cover both the purchase and repair costs.
If your dream home is something that is in need of serious rehab, you would need to pay for both the selling price and the cost of renovations if you do not take advantage of one of these popular fixer upper loans.
Financing Options for Fixer-Uppers
Home buyers who want to buy and rehab a house at the same time should find a loan that will finance all expenses associated with buying a fixer-upper. Fixer-upper mortgages typically cover the costs of buying the property and the necessary renovations.
However, these loans may usually come with additional fees compared to traditional loans. It’s important to have available cash-on-hand for all possible out-of-pocket expenses. Also, these loans will require borrowers to have verifiable employment and income to qualify.
Here are the top fixer-upper loans you may want to consider:
1. FHA 203(k) Improvement Loan
The FHA 203(k) is a government mortgage that provides financing for both the purchase of the property and its renovations, making it possible for you to make the necessary repairs soon after closing.
The FHA 203(k) is insured by the Federal Housing Administration, making it less risky for private lenders to issue the loan. With FHA 203(k) loan, the funds go into an escrow account and your contractors are paid as the renovation is completed.
FHA 203(k) Requirements
- Borrowers should be owner/occupants or nonprofit organizations, not investors.
- Available for one- to four-unit properties. Condominium and townhome owners can also use FHA 203(k) for interior projects.
- The property must be your primary residence
- The renovation should begin within 30 days of your agreement and the project must be completed within six months of closing.
- The appraisal report should include the appraisal value of the property after the renovations are completed.
- Funds should not be used for luxury items.
- Only licensed contractors who are familiar with FHA 203(k) should do the work.
- The minimum credit score typically required is 580, but some lenders may require a score of 620 to 640 to qualify for a 203(k).
- The minimum loan amount is $5,000. The maximum limits vary by location.
- Down payment can be as low as 3.5%.
The FHA 203k loan is probably one of the best fixer upper loans you can get today. With the low down payment of 3.5% you will use very little out of pocket funds. The only thing you need to deal with are the strict rules that govern the program.
2. VA Renovation Loans
VA renovation loans are a government mortgage insured by the U.S. Department of Veterans Affairs and are available for eligible active U.S. service members, veterans, and select surviving spouses.
You can get a VA renovation loan at the same time as your original mortgage loan, allowing you to do immediate repairs and upgrades if you’re buying a fixer-upper.
A VA renovation loan is rolled into your mortgage and offers all the benefits included with a traditional VA loan. However, it’s not available for large-scale renovation projects — it is good for smaller upgrades like safety repairs and cosmetic improvements.
VA Renovation Loan Requirements
- Only for eligible service members, veterans, and select spouses.
- Renovations should be completed within four months after closing.
- The project should be done by a VA-registered general contractor with appropriate general liability insurance.
- The credit score requirement is 620 or higher. Some lenders may allow for lower scores.
- No minimum loan amount required.
- No down payment required.
- The loan can be financed for 30 years.
One of the great benefits of a VA loan is the no down payment requirement. Although the funding fee is an additional cost, you can finance that as well.
3. Fannie Mae Homestyle Renovation Loan
Fannie Mae Homestyle renovation loan provides financing for both purchase and renovation costs and combines them into a single mortgage. Unlike with other fixer-upper loans, this program offers flexibility as it allows a wide range of renovation projects, including luxury upgrades to the property.
You can finance up to 75% of either the purchase price plus the renovation costs or the appraised value after the renovation, whichever is lower.
Fannie Mae Homestyle Renovation Loan Requirements
- Available for primary homeowners and secondary home investors
- Available for one- to four-unit primary residences, one-unit second homes, and one-unit investment properties.
- All required repairs should be completed within 12 months after closing.
- The appraisal report should include the appraisal value of the property after the renovations are completed.
- The credit score requirement is 620 or higher.
- Available for 15- and 30-year terms.
This option is a very good one if you have the 25% down because you are not restricted by the type of improvements you want to make in the home.
4. Freddie Mac CHOICERenovation Loan
Freddie Mac’s renovation mortgage program allows home buyers to include the financing of home renovations with the purchase loan. This program doesn’t require a consultant to approve the project.
Freddi Mac CHOICERenovation loan will finance any renovation or repair as long as it is something that is permanently attached to the property. It can also finance housing resilience projects such as storm surge barriers, foundation retrofitting for earthquakes, hazardous brush and tree removal in fire zones, and retaining walls.
Freddie Mac CHOICERenovation Loan Requirements
- Available for primary homeowners and secondary home investors.
- Not available for manufactured homes.
- Cash-out and traditional finances are eligible.
- The home buyer should not be affiliated with or related to the builder, developer, or seller.
- Some borrowers can make a 3% down payment, some can finance home improvements costs up to 75% of the appraised value of the home after renovation.
- The credit score requirement is between 620 to 660, depending on the amount of down payment.
This loan program is interesting because it allows investors to also take advantage of the program.
This is a recap of the four loan programs we discussed above:
Fixer-Upper Loan Options
|Loan Program||Down Payment||Credit Score|
|FHA 203k Rehab Loan||3.50%||580|
|VA Renovation Loan||0%||600|
|Fannie Mae Homestyle Renovation Loan||up to 25%||620|
|Freddie Mac CHOICERenovation Loan||up to 25%||620|
- The last two programs above will allow you to finance up to 75% of the final appraised value or total cost to purchase and rehabilitate the property (whichever is less). If you are able to make a smart purchase and fix up the property efficiently, you may be able to make this work with a very small down payment.
Things to Consider Before Buying a Fixer-Upper
Buying a fixer-upper is a popular way to own a house at a great deal. However, there are risks and challenges associated with buying a fixer-upper, especially if the house needs extensive rehabilitation. You have to consider the possibility that you may need to do a lot of costly work before you can make the house valuable.
Here are the things that you also need to consider before buying a fixer-upper:
In real estate, location is everything. A not-so-good house in the right location can help you score a great deal. However, “good location” is subjective and it can mean different things to different people. Picking the right location requires knowledge about the market, but it also depends on what matters to you the most.
Other factors that you need to consider when choosing a location include:
- Centrality: How near or far from the city do you want to live? Is the area accessible from and to your workplace?
- Neighborhood: Is the neighborhood safe? Is it accessible to important amenities such as schools, hospitals, groceries, shops, restaurants?
- Development: Are there future plans for development in the area that will help increase the value of your property?
- Exact property location: Is the property situated on a busy road or a quiet neighborhood? Is the property accessible by both private vehicles and public commute? It it a waterfront property or at the end of a cul-de-sac?
If the property is the right price but is in a bad location, then you may want to keep looking for something else. Even if the house is beautiful when you are finished, if you are not happy with the location then you may not be happy living there long term.
The structure and foundation of the house are important. When looking for a fixer-upper, consider the materials used and the general layout of the house. Any structural issues can be difficult and costly to fix, so it’s important to have the house inspected before you decide to make an offer.
Work with a professional home inspector to help you identify the fixes that the property requires. This will help you create a budget for the renovation costs.
You may also want to get other inspections such as:
- Roof certification – to identify roof-related problems
- Sewer line inspection – to evaluate the house’s sewer lines and septic tanks
- Pest inspection – to inspect the existence of harmful pests like rodents and termites
These structural inspections should not be overlooked because they can cost thousands to repair later.
Establish a Fixer Upper Budget
It’s important to create a budget for your fixer upper and know how much you will need to spend on the purchase of the property, its renovations, and the closing costs of the loan. While there are loans available for fixer-uppers, you still may still need to have available cash for down payment, inspections, appraisals, and closing costs.
You also need to hire the right contractor for the rehab as this can affect your budget and the time frame allotted for the renovation work to be completed. With an FHA 203k rehab loan, all of that will need to be determined before your loan is approved.
Common Fixer Upper Home Improvements
A fixer-upper house can be a great opportunity as long as you know which repairs are acceptable and which ones should make you walk away. The ideal fixer-uppers are those that require cosmetic touch-ups to improve the general appearance of the home. Houses with major structural problems are often not worth your time and money.
Here are the common home improvements you need to work on when buying fixer-uppers:
- Paint: New paint covers imperfections and will give the old house the color that it needs to look like brand-new. Painting the interior of a house will cost an average of $2 to $6 per square foot.
- Kitchen: A kitchen is an important aspect of a fixer-upper project. Making a kitchen look more appealing and more functional is necessary to add value to your property. On average, a typical kitchen remodel costs around $150 per square foot.
- Windows: Old windows need to be replaced to make your property become more valuable. Windows are an important aspect that makes your property well-lighted and ventilated. Window replacements typically cost between $170 to $1,200 per window, depending on its type.
- Flooring: Old flooring can have a negative impact on the overall appeal of the property. You may replace old carpets by hardwood or laminate floors. Depending on the materials chosen, the average cost of new flooring installation ranges between $3 to $18 per square foot.
- Bathrooms: Bathrooms are one of the most important rooms that need to be updated in a fixer-upper house. Updating the essentials in a small or medium-sized bathroom may cost around $3,500 to $7,000. This could go higher depending on the size of your bathroom and the upgrades that you want to include.
- Roofs: Roof repairs or replacements are sometimes common in fixer-uppers, however, they can be costly. The cost of roof repairs depends on the condition of the roof — it typically ranges between $150 to $3,000. The average cost of replacements ranges between $400 to $550 per square, depending on the size and material use.
These are just a few of the common repairs and honorable mentions are siding, home lighting, electrical and plumbing work
When to Walk Away From a Fixer Upper
In general, properties with structural issues and foundation problems are not worth risking for. You also need to check for possible plumbing and electrical issues which can be costly and difficult to remedy. Further, if the cost of the house and its renovations are beyond your budget, it’s best to just find another home rather than spend beyond what you afford to repay.
Is a Fixer Upper Right for First Time Home Buyers?
You could be biting off more than you can chew if you are thinking about purchasing a fixer upper as your first home. You are embarking on home ownership for the first time and everything that goes with that. The financial responsibility and just the general maintenance required to keep up the home. When you add remodeling and in some instances gutting a home as a first time home buyer, it can be a huge stressful weight on your shoulders.
Meanwhile, buying a fixer upper as a first-time home buyer can also be a great way to get into a neighborhood that you typically could not afford. Especially if you are able to qualify for the FHA 203k loan mentioned above which only requires 3.5% down.
Related Questions – Financing a Fixer-Upper
Are fixer upper mortgage rates higher?
You may find rates for fixer-upper mortgages may be a bit higher. However, they will still be competitive and we recommend that you find the right lender who has experience doing these loans.
Where can I find a fixer-upper lender?
We can help you to find a lender to finance your fixer-upper. Just complete the short loan scenario form below and put fixer upper in the comments at the end. One of our lenders will reply with a rate quote and will be there to answer all of your questions.
What are the fees for fixer-upper mortgages?
The fees for a fixer upper mortgage will be basically the same as a traditional mortgage. Like any other mortgage program you should find out what the fees are in advance before moving forward.
Are fixer-upper loans the same as fix and flip loans?
Fix and flip loans are different because they are used for investment properties and will usually require a larger down payment. Fixer-upper mortgages are mostly used for primary residences.
Fix and Flip Loans – read about your fix and flip loan options if your goal is to purchase an investment property to rehab and sell quickly for a profit.
Home Improvement Loans – If you already own the home and you simply want to finance some home improvements, this article will help guide you.