Buying a fixer-upper is an American tradition. If you are willing to put up with the blood, sweat, and tears of turning a rundown house into your home.Then buying a fixer-upper is the way to go.These houses are often the best deals on the market. The challenging part is figuring out how to pay for all of the work you need to do.
Don’t despair, there are two loan products on the market today which can be a big help as you begin to turn the right house into the home of your dreams.The Federal Housing Administration’s (FHA) 203(k) Home Renovation Loan, and FannieMae’s HomeStyle Loan program.Both programs allow homebuyers to pay for that fixer upper with little money down and at attractive interest rates.
FHA 203(k) Home Renovation Loan
This program was designed for buyers who lack the funds to pay a large down payment or have a less-than-perfect credit score. Minimum down payments range from 3.5% to 5% depending on where you live and buyers with a credit score of 580 or better can easily qualify.In fact, buyers with a 500 credit score can qualify if they bring a 10% down payment to the table.
There are also two types of 203(k) loans.The standard 203(k) and the streamlined version – also called the limited 203(k).The standard loan covers more types of home improvement projects and is best suited to larger-scale jobs likes adding a new room, or structural improvements.The streamlined 203(k) is ideal for cosmetic projects like resurfacing a roof or replacing windows.
No matter which 203(k) loan type you choose, the minimum repair amount is $5,000 and homeowners are required to hire a consultant to oversee the project.In addition, the consultant will help to determine whether the fixer upper project is feasible and will prepare contracts and other documents.
One plus of the 203(k) program is that a home buyer can borrow up to 110% of the home’s value or the cost of the home after the renovations – whichever is less.This is really useful for a buyer on a budget as it means they don’t have to pay for the repairs before taking possession of the home.The maximum loan amount for a 203(k) loan can go up to $625,000 depending on where you live.Though one of the downsides of this program is that the mandated mortgage insurance costs more than private options.
203(k) loans are just for primary residences, not second homes or investment properties.However, they can be used for multi-family homes, townhouses, and condos.Also, recent changes to the loan program allowed for improvements to be made to a home’s foundation.And in some cases, 203(k) loans can be used to knock down an existing home and build a new one in its place.
Fannie Mae HomeStyle Loan
Unlike 203(k) home renovation loans, the HomeStyle loan program is primarily for buyers with perfect credit. For example, buyers with a debt-to-income ratio around 45% will need a credit score 700 or better.
That being said some of the same aspects of the 203(k) are available in this program from Fannie Mae. Down payments are as low as 5% and interest rates are also benefitting from historic lows.
One benefit of the HomeStyle program is that a buyer will get up to 12-months to complete the improvement project on their fixer-upper.This will give you enough time to get the project done without having to rush. Another benefit is that you can borrow up to half of what an appraiser estimates the house to be worth after repairs.
For example, it you purchase a house for $150,000 and the appraiser estimates the house to be worth $250,000 after repairs.Then you can borrow up to $250,000, less the down payment.This is a big plus compared to other home improvement loan programs on the market today.
While the 203(k) and HomeStyle programs allow for you to do some of the work yourself, you can’t be paid for the labor – even if you are a professional contractor.Also, the loan fees are typically higher in both cases as the loan packages are more complex.As such, you need to give yourself up to 90-days for closing.Anything less than that might cause problems.
Whilst interest rates might be slightly higher than traditional loans, the difference is usually less than ¼ of a percent.The final benefit is that both programs allow a six-month grace period if you cannot occupy the home during the renovation period.