Financing a Dream Home When It's a Fixer-Upper

The great news is you've found your dream home. The home is everything you've ever dreamed of and you cannot wait to begin your life in your new home. There is one small hurdle, however: it's a fixer-upper.

So, how can you finance repairs on your new home? Here are some options to consider.

The Mortgage Issues

The first challenge for a fixer-upper home is the mortgage. Banks usually only loan as much money as the home appraises for. In the case of many fixer-uppers, the buyer often cannot borrow enough money via their traditional mortgage to also cover repairs.

For example, a home that appraises for $200,000 and has a sale price of $200,000 will in most cases not allow for a mortgage of $250,000 to cover the $50,000 worth of repairs the home may need. Without enough cash on hand to cover rehab and repair costs, new home borrowers may need to seek a different types of funding.

Option #1: Standard FHA 203(k) Mortgage

An FHA 203(k) loan is an option for potential homeowners who have limited cash on hand for a down payment and/or have challenges with their credit score. To be eligible for an FHA loan, borrowers usually need to have a FICO credit score of at least 580 and a minimum down payment of 3.5 percent. However, if a borrower has a larger down payment of 10 percent or more of the home’s purchase price, the FICO credit score can be as low as 500.

The standard FHA 203(k) loan allows a home borrower to seek more loan money than the home may be worth before rehab and repairs. Buyers may be able to borrow up to 110 percent of the home’s appraised value. This type of loan may allow the mortgage holder to add rooms, make structural repairs to the home or other improvements.

In most cases, planned repairs or rehabilitation must meet the following criteria:

• Increase the overall value of the home,
• May involve a total demolition of the existing structure, but must leave the previous foundation intact. If the foundation is in disrepair, it can be repaired accordingly,
• May be overseen by a 203(k) consultant who will assess the financial feasibility of the project and oversee all aspects of the work to ensure it is done professionally.

Option #2: Limited FHA 203(k) Mortgage

The limited FHA 203(k) mortgage allows for non-structural repairs to the purchased home. A buyer may be able to borrow up to $35,000 above the purchase price. Possible repairs may include roofing, gutters, HVAC systems, decks, windows, doors, siding, flooring, plumbing and electrical systems.  In many cases, it can also be used to purchase new appliances, install insulation, or make cosmetic upgrades to the home such as new paint.

Option #3: Fannie Mae HomeStyle Renovation Mortgage

For borrowers with higher credit scores and more cash available for a down payment, a Fannie Mae HomeStyle Renovation Mortgage may allow buyers to make repairs over a 12-month timeline.

• Funds can be used for repairs, remodeling, energy improvements, or other work as long as it is permanently attached to the home and increases the property’s value.
• You will need to provide copies of your repair plans to the lender who will oversee the home’s repairs to ensure they are completed in a timely manner.
• Some Do-It-Yourself work is permitted, but it cannot exceed 10 percent of the home’s value in most cases.

A Fannie Mae HomeStyle Renovation Mortgage may allow a potential homeowner to borrow up to 50 percent of the home’s expected appraised value after renovation in order to complete the construction work. Fannie Mae HomeStyle mortgages are typically subject to the same conventional mortgage limits and PMI rules that other loans must comply with.

Taking advantage of various mortgage options can help you buy the home of your dreams, even if it's a fixer-upper.