There are quite a few loan options available to buy fixer-upper homes.
“By buying a fixer-upper, you can definitely increase the value of the home as it appreciates and as you fix it up,” says Sarah McCalmon, loan officer for the Sierra Pacific Mortgage, Inc., in San Diego. “You also have the pride of doing something good for the neighborhood and your community.”
There are several different types of loans to choose to fix up real estate that needs remodeling — inside, outside or both.
FHA loans for fixer-uppers
The Federal Housing Administration (FHA) – which is part of the Department of Housing and Urban Development (HUD), offers a few different ones including the FHA 203K Rehab Loan. FHA partners with state and local housing agencies and non-profit organizations to rehabilitate properties.
According to the FHA website, these 203(k) loans can be combined with other HUD programs to help with the rehab. With the FHA 203(k) loan, the borrower can get just one loan at a long-term fixed rate to finance the purchase price of the home and the renovation costs. To provide the funds for the home improvements, the mortgage amount is based on the projected value of the property with the work done, taking into account the cost of the work. The buyer can also put down as little as 3.5 percent.
“To get such a loan, though, you have to get a bid from the contractor, and that contractor must sign an agreement with the lender. That underwriter will then review the credentials and client references of the contractor,” McCalmon says. “The borrower can do the repairs themselves, too, but the money for the rehab has to be based on a bid.”
You have to find a local lender that can help you navigate the process. The mortgage lender also has to be an approved FHA lender and go through a special 203(k) certification course.
How do I qualify for a 203k FHA Rehab loan?
Some of the rules that might mess people up with these loans are the construction must start 30 days from closing and be complete in 6 months from closing. If the homebuyer cannot live in the new home while it is being finished, FHA will add an additional six months of mortgage costs to the loan so the homebuyer can live somewhere else without being too strapped for cash.
“Six months is fast, and if you’ve ever rehabbed anything, it would be very difficult depending on the scope of the rehab, to make sure that you are getting it done in 6 months. If you don’t get it done in that time, you may not get all the funds,” she says.
And McCalmon knows about rehabbing. She and her husband bought a fixer-upper, and her husband is a contractor. She has advice for homebuyers planning DIY renovations.
“We live in the construction zone, and now it’s 14 months later, and we are still working on it,” she says. “Don’t underestimate the time and money you will spend. Always add 10 percent on top of your budget for unforeseen problems.
What homes are eligible for 203k FHA Rehab loans?
But remember that you can’t necessarily get a loan for the worst house on the block all the time. It needs to be in livable condition, she says. For instance, one of her borrowers was trying to buy a very run-down home. But it was missing the floors.
“Homes have to have a framework, including floors, and they can’t have broken windows to get a loan. They also have to have an operating furnace and operating stove,” McCalmon says.
FHA also offers add-on options including the Energy Efficient Mortgage that can increase the maximum amount of the loan to allow you to add such energy-efficient items as windows and appliances.
You can also get involved in the Good Neighborhood Next Door program. It is meant to revitalize certain communities by helping out certain professions such as law enforcement officers, firefighters and teachers. These add-ons both have to be for owner-occupied residences, not rentals, second homes or investment property.
VA loans for fixer-uppers
The Veterans Administration (VA) also offers low-interest home loans for 100 percent of the financing to retired or active-duty military service members and their spouses. These loans offer a low credit score minimum. According to the VA website, the loan program is there to “help you buy, build, repair, retain or adapt a home for your own personal occupancy.”
These loans don’t require private mortgage insurance if you don’t have 20 percent down because the government backs them. Combined with the lower interest rate, that can mean a good deal of savings on monthly mortgage payments for the homeowner.
McCalmon says that you can also get a VA EEM (energy-efficient mortgage) option.
“You can either increase the loan amount by $3,000 based on a bid for energy-efficient upgrades such as new appliances or get more than $6,000 if you need a more intensive remodel,” she says.
Conventional loans for fixer-uppers
Other home buying options for rehabbing include a conventional mortgage which you can put as little down as 5 percent and then use the savings you might have used to make a bigger down payment for some of the repairs.
“A lot of people still believe you have to put down 20 percent. But you don’t,” she says.
She warns people to not go overboard when rehabbing. “You don’t want to make a 3-bedroom home into a mansion when the whole neighborhood is average family homes,” she says.