By A Fixer-Upper for Your First Home? Here Are Your Mortgage Options.
With the supply of new homes tighter and home prices higher as a result, it’s not surprising why some turn to fixer-uppers. These homes can be less expensive to acquire and fetch a good resale value. There are mortgage products to pay for the purchase of a fixer-upper and its renovation/improvement costs at the same time.
What’s a Fixer-Upper, By the Way?
In real estate, a fixer-upper is a house in need of repairs to make the home liveable and comfortable. The buyer usually hires an expert, usually a contractor, to tag along and examine the condition of the home and list what needs to be done.
While it all takes some minor repairs to restore a property, others would require far extensive work in thousands of dollars.
Because these repairs are part and parcel of the house to be purchased, some programs such as the FHA’s 203k loans and Fannie Mae’s HomeStyle® Renovation mortgage roll these two capabilities – purchase and renovation – into a single, dual-purpose mortgage.
Get to Know the Mortgage for Your Fixer-Upper
First, we have the 203k loan. There are two kinds that match the extent of the rehabilitation needed in the home.
- Standard. This covers all eligible activities to rehabilitate the home with no cap for the costs. Expect more work on the paperwork.
- Streamline or Limited. As its name implies, less extensive improvements of up to $35,000 are covered by this loan. The documentation may not be as tedious as the standard 203k but it requires the home to be move-in ready while the rehab work is ongoing.
The 203k in general is applicable to owner-occupied single-family homes only. Second homes for investment are not allowed.
Second is the HomeStyle® Renovation mortgage from Fannie Mae. This mortgage is used to finance moderate home improvements that add value to the property and attach to the structure permanently.
A HomeStyle® can be used for owner-occupied and investment properties. To calculate the amount that can be borrowed, the lender will take into account the as-completed value of the property once all the repairs are completed.
The borrower must hire his/her own contractor whose qualifications and experience will be reviewed by the lender. The lender can allow the borrower to carry out the repair work himself/herself provided that it meets the following requirements:
- the financing does not exceed 10% of the as-completed value,
- the property is a one-unit, owner-occupied house, and
- the reimbursement limited to the cost of materials and labor, as properly documented.
Choosing between the two
Choosing either would depend on your credentials. The FHA is known to be lenient toward borrowers with average credit unlike conforming loans that have higher credit standards.
There’s also the cost of the repair. Each loan has its own maximum loan-to-value ratio or rehab loan-to-value ratio or rehabilitation costs cap, so to speak.
What’s clear is if the subject home is non-owner occupied or for rental, your option is the HomeStyle® mortgage.