Everything You Need to Know About Financing a Fixer-Upper

The housing market is growing increasingly competitive. Fortunately, that’s where renovation mortgage loans come into play. Financing a fixer-upper can make the difference between compromising on your purchase and choosing a home you’re sure to cherish for years to come.

In a competitive housing market, renovation mortgage loans can be lucrative for homebuyers of all kinds. Financing a fixer-upper can make the difference between compromising on your purchase and choosing a home you’re sure to cherish for years to come.

Every homebuyer’s goal is to find a beautiful home in the perfect neighborhood. that meets the needs of their family. However, sometimes your dream location may only have homes that need a little TLC. Your first step to finding available options to make a home into what you want and need is to connect with an experienced loan officer. Find a your perfect lender match here. 

The Benefits for Homebuyers

Over the past few years, many first-time (and move-up) homebuyers have found themselves in a tough spot, unable to find affordable homes – sometimes having a hard time finding any homes at all.  Increasing rates and limited inventory have been the main causes of this distress. If you have toured many homes and thought ‘it’s nice but it’s just not checking all my boxes’, a renovation loan might be a good option for you. 

Fortunately, Summit Mortgage help you navigate this process! We can come alongside of you and partner to find a home improvement loan option that is right for you. Renovation financing options (Conventional, FHA, USDA and VA), allow us to help you open your eyes to new possibilities with the homes that are currently available.

Renovation loans allow homebuyers and homeowners alike to get a single, fixed-rate loan that covers the costs of acquiring a property AND renovating it to create the space they need.

The Benefits of a Fixer-Upper

Why do some buyers avoid homes in need of renovation during their search? In many cases, it’s because they’re unsure they can balance the cost of purchasing a home and making the necessary repairs.

If you are trying to find a home in a certain neighborhood, school district or community this can make finding a home even more challenging; this is where a renovation loan option can come in handy. These types of loans can allow you to walk into that not-so-perfect home in the perfect location and see it with a fresh set of eyes. You can walk in the door and see it’s potential and ways to make it your own or adjust it to meet the needs of your family – then you get your dream home in a perfect location.

A renovation mortgage allows you to consider a home that requires a little extra TLC before you move in. Such homes may have structural concerns or just need serious remodeling. However, they can also allow you to:

• Get a larger home
• Find a home in a desirable neighborhood
• Ensure that you and your family won’t outgrow a starter home in just a few years
• Create the home of your dreams without investing in new construction
• Bring modern amenities to the character and vintage beauty of an older property

With all these benefits in mind, it’s easy to see why financing a fixer-upper with a renovation home loan is an ideal choice for many buyers.

Top Fixer Upper Loans

There are several options for home loans to consider when exploring the possibility of renovating a home at the time of purchase. These loans generally include specific provisions for the types of renovations allowed, the cost of renovations, when repairs must be completed, and who can complete them.

Your loan agreement stipulates how contractors are paid, typically from an escrow account, and how often payments are disbursed. Your personal loan officer will help you learn more about the specifics of each program and which is best for you.

Some of the most common fixer-upper loans include:

FHA Standard 203(k) Rehabilitation Mortgage

The FHA Standard 203(k) Rehabilitation Mortgage is a renovation loan program that is well-known among first-time or move-up homebuyers interested in properties that need some work as well as current homeowner’s who need to make improvements to their current home. These loans include financing for the property’s purchase and the necessary repairs, allowing you to make essential upgrades immediately after closing.

The most significant benefit of this program is its flexibility. Property owners can make both minor and major repairs, as well as cosmetic improvements. However, it’s important to remember that these loans are only available to borrowers financing a minimum of $5,000 in renovations. 

Other requirements include:

• Eligible for one-, two-, three-, or 4-unit primary residences
• Renovation work must begin within 30 days of your agreement
• All work must be completed within six months of closing
• Your appraisal report must include an “as-completed” appraisal value that reflects the property’s value after renovations are complete
• Funds may not be used for luxury items
• A licensed general contractor must complete the work

The FHA 203(k) Mortgage also addresses another big reason potential buyers might avoid fixer-uppers: where to live during the renovation work. The six-month maximum period requirement ensures work is completed quickly, and borrowers may include funds for housing expenses to live elsewhere during this time. The program can also be used for current homeowners to refinance an existing property and complete renovations without having to relocate your whole lives. 

Fannie Mae HomeStyle® Renovation Mortgage

Like the FHA 203(k) Mortgage, a Fannie Mae HomeStyle® Renovation Mortgage allows borrowers to purchase a home in need of repairs or to refinance their current property while including the funds needed for renovation. However, a few essential distinctions make this loan more attractive in some cases.

For example, the program allows luxury upgrades to your property. There’s also no minimum for repairs, so it’s an excellent choice for property owners who need to tackle smaller projects but lack the cash flow to do so without financing.

Additionally, loan costs can be approved up to the lesser of 75% of the purchase price plus the expense of repairs or the “as-completed” appraisal value, depending on your needs and preferences. Requirements for this program include:

• A credit score of 620 or higher
• Available for one- to four-unit primary residences, one-unit second homes, and one-unit investment properties

Generally, improvements should be permanently affixed to the real property (either dwelling or land), with the exception of certain appliances installed with kitchen and utility room remodels. A borrower may use HomeStyle Renovation to purchase appliances as part of an overall remodeling project that includes substantial changes or upgrades to the rooms in which the appliances are placed.

After closing, homeowners will have 15 months to complete all required repairs. For DIY enthusiasts, some funds are available for renovations completed by the homeowner. In other cases, licensed contractors are required.

VA Renovation Loans

Available for eligible active-duty U.S. service members, veterans, and surviving spouses, VA Renovation Loans offer all the great benefits that make other VA loans appealing while making financing a fixer-upper easy.

VA Renovation Loans are available for minor upgrades or  large-scale renovation projects with a maximum set on renovation costs of $200,000. They are available with no down payment and no minimum amount. However, some requirements apply, including:

• A credit score of 580 or higher
• All work must be completed within nine months of closing
• Hiring only one general contractor, who must register with the VA and carry appropriate general liability insurance

While these loans are incredibly flexible, they are not available for cash-out refinancing.

Learn More About Rehabilitation and Renovation Loans

Financing a fixer-upper can make the difference between compromising on your purchase and choosing a home you will cherish for years to come. If you’re interested in renovation, your personal lender can guide you through the purchase and renovation process with expert advice.