Fixer-upper home loans | How to buy and finance a fixer-upper

Your guide to buying a fixer–upper

Fixer–upper homes often look more attractive in a hot housing market. Their prices are typically lower and there may be less competition from other buyers.

In this guide, we share pointers to help you find, buy, and finance a fixer–upper home.

Whether you plan to flip the property or live in it, you’ll have plenty of choices over the loans you use.

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How to buy a fixer–upper home

The process of buying a fixer–upper is similar to when you purchase any other home. Be sure to let your real estate agents know you’re looking for one so they can call you when new options hit the market.

Especially with fixer–uppers, you need to do your due diligence before you commit yourself. Any home can have expensive structural issues, but fixer–upper homes tend to have more. So, unless you’re an expert yourself, you need to get in a professional to warn you of defects that could blow your budget out of the water.

That means not skipping the home inspection – even though it can be tempting to waive an inspection when you’re in a bidding war.

And, before you begin to look at properties, get your financing lined up.

If you plan to use a fixer–upper home loan, you’ll need to have a contractor estimate the scope and cost of repairs before you can get approved.

Real estate agents and sellers won’t take you seriously unless you can prove you’re qualified for financing. And that means having a valid mortgage preapproval letter in your pocket.

Financing your purchase and renovation

In the past, you’d often need three separate loans to buy and repair a fixer–upper home. Those included:

1. Initial mortgage to buy the home
2. Another loan (often a personal loan) to fund the renovations
3. A refinance when the work was completed to pay off the first two loans

Of course, having three separate loans is far from ideal. You’ll pay closing costs twice, at a minimum. And personal loans can have lower budgets and higher rates for your renovation costs.

Luckily, lenders gradually recognized that borrowers needed something better. And they developed all–in–one mortgages to buy and repair fixer–upper homes.

With these rehabilitation loans, you borrow one lump sum that covers the purchase and renovation costs for your new home. You only have to apply for a single loan and pay one set of closing costs, making the whole process simpler and more affordable than in the past.

Today, there is a wide selection of these ‘fixer–upper home loans’ to choose from.

Fixer–upper home loans

Below, we walk through the most popular types of rehab loans.

Please note that we’re focusing on the needs of first–time buyers who will live in the home they’re purchasing. If you’re planning to fix and flip the home, these loans may not apply to your situation.

• Fannie Mae Homestyle – 3% down payment. Minimum 620 credit score. Stop paying mortgage insurance when your mortgage balance drops to 80% of your home’s market value
• Freddie Mac CHOICERenovation – Very similar to Fannie’s Homestyle. The 3% down payment is available if you combine this product with Freddie Mac’s Home Possible loan
• Freddie Mac CHOICEReno eXPress – A streamlined version of CHOICERenovation for when the rehab budget is small: up to 15% of the home’s purchase price
• FHA 203(k) – 3.5% down payment but a low minimum credit score of 580. You’ll have to keep paying mortgage insurance until you sell, refinance or pay off the loan
• VA rehabilitation loan – If you’re an eligible veteran or service member, this is likely to be your best choice. 0% down payment, low mortgage rates and no continuing mortgage insurance makes this hard to beat

Can I repair a fixer–upper myself?

Naturally, your project will be more financially attractive the more work you can do yourself. Because labor costs can be high. But the amount and types of work you can do yourself may be limited by your mortgage program.

Many fixer–upper loans either cap the value of the work you can do yourself or ban you from doing any of it. If you’re relying on “sweat equity” (your own labor) to make the project viable, be sure that the loan you choose allows this.

In any event, all work will be inspected and must meet high standards.

Finally, don’t scrimp when you need expertise.

You’ll likely need a construction expert and a home inspector to make sure you’re not buying a money pit. If you’re flipping, you should have a friendly real estate agent check your numbers. And, later, you should have specialists install – or check your installation of – electrical wiring and plumbing to make sure everything’s up to code.

Other ways to finance a fixer–upper

One alternative if you’re relying on sweat equity is to use a personal loan to fund your rehab project and then refinance that using a home equity loan (HEL) or home equity line of credit (HELOC), both of which are second mortgages.

This strategy has pros and cons.

The main pro is that home equity products tend to have much lower interest rates than personal loans. The main con is that home equity loans tend to have high closing costs, although a few banks may offer them with no closing costs at all.

Be sure to compare rates and loan options

As with all mortgages and loans, be sure to shop around between multiple lenders and compare quotes to identify the best overall deal.

Whether you can qualify for a HEL or HELOC will depend on how much value your rehab project has added to your home. Many lenders want the combined balances on your main mortgage and second mortgage to be no more than 80% of your home’s market value. And they’ll get an appraiser to check.

But some lenders allow you to borrow up to 85% or even 90% of the market value. So, search out one of those if this is an issue for you.

How to find fixer–upper homes

There’s no magic to finding a fixer–upper. It’s mostly the same proces as finding any other home. Start with the Multiple Listing Service (MLS) website, real estate apps, and, of course, your local real estate agent or Realtor.

However, there are five actions you can take that may help you move more quickly:

1. Get preapproved for your mortgage. You’ll be taken much more seriously by agents and sellers once your financing is lined up
2. When choosing a buyer’s agent, pick one that specializes in fixer–upper homes. You want one who’s known within the local real estate community as a fixer–upper specialist because they may be told about opportunities earlier than others
3. Keep a close eye on distressed properties. These are often foreclosures and short sales and you may have to seek out their listings. But they can make great fixer–uppers
4. Find local property auctioneers and register for alerts
5. When searching mainstream listing websites use “fixer–upper” as a keyword

Those might help. But recognize that it’s hard to find any house right now. And you may need to persevere to find the fixer–upper home you want.

Realistic budgeting is crucial

Of course, it’s vital when searching to match the home price and rehab costs to your budget. If you’re not flipping for a living, it’s easy to let your heart rule your head and to make optimistic assumptions about how much different parts of your project will cost – and how much value they’ll add.

So pretend you’re a professional flipper, even if you’re not. Build spreadsheets and itemize what you’ll spend on each improvement and each part of each improvement.

The more detailed your budget, the easier it is to recognize overspends early – and to adjust other elements so you stay on track. For example, if you decide marble countertops in the kitchen are necessities, you must downgrade other amenities to balance out the cost.

What to consider when you buy a fixer–upper home

Fixer–upper homes might seem especially attractive in this housing market, where prices on many homes have risen at an astronomical pace.

And, for the right person, buying a fixer–upper as a starter home can be a great option. But it’s not for everyone. There are some real pitfalls to be aware of.

Here are the main pros and cons of buying a fixer–upper home.

Pros of buying a fixer–upper

You probably already know the major advantages of buying a fixer–upper home:

1. The renovated home you end up with could cost you many thousands of dollars less than it would have if you’d bought it in that state
2. Most home hunters run a mile from an unattractive home. So you’re competing with a smaller pool of wannabe buyers. And in the current sellers’ market that could make the difference between your becoming a homeowner or remaining a renter
3. The sooner you buy and can lock your rate, the sooner you’re protected from rising mortgage rates. Those were a real issue when this was written and may well still be when you’re reading it
4. You get to choose the décor, layout and fixtures, fittings and appliances of your next home. You’re not inheriting someone else’s taste

That’s quite a list of serious pros. But don’t forget the drawbacks.

Cons of buying a fixer–upper

The biggest drawbacks to buying a fixer–upper are the risks. One is the possibility of your budget running away with you. But the main one is that you could buy a place with hidden defects.

Suppose you miss sinkage under the foundations or the fact the roof needs replacing or areas of hidden termite damage. You could find yourself with an unsellable property with repair costs that could run to tens of thousands of dollars more than you budgeted.

With an older home, you can’t eliminate those risks altogether. But you can minimize them by having a professional home inspector, a reputable contractor and, if necessary, a licensed pest controller take a good hard look before you commit.

Your next steps

So, where should you begin? The first thing to do is to decide on the type of mortgage you want. For many first–time home buyers purchasing a fixer–upper, an all–in–one rehabilitation loan is a great option.

Once you’ve settled on the loan you want, get preapproved. Preapproval letters are only valid for a limited period (often 30–90 days), but you can renew them as often as necessary. Always keep yours up to date while house hunting.

Now, with your letter in your pocket, you can start having fun. Start searching and viewing fixer–upper homes. And try to find a buyer’s agent who specializes in those.

Ready to go? Let us help you find lenders who can help you.