All You Need to Know About Financing a Fixer Upper Property

Financing a fixer upper property is a little different than financing a home. Make sure you have all the details before purchasing your first fixer upper.

Looking for a fixer-upper as a home or simply a passion project? Well, financing a fixer upper is a little different than a regular home. 

Considering this, there are some important things to know about each of the types of financing loans, so let’s get to it. 

In this article, we will cover the benefits of a fixer upper and the various types of financing. Keep reading to learn more!

The Advantages of A Fixer Upper

Do you ever wonder why home buyers avoid housing that is in need of a renovation? Well, most people believe that it’s not worth it because the cost of purchasing the home and necessary repairs can’t be balanced out. 

If people were more decisive in purchasing fixer upper homes, they could shave weeks or even months off of their home search. For most people, finding the right home is the hardest part of buying a home. And by avoiding homes that need a renovation you’re not making it any easier.

A renovation mortgage of any kind will allow you to consider a home that you can transform from poor to pristine condition. In general, fixer upper homes have structural issues or they just need severe remodeling, but they also let you:

  1. Buy a larger property
  2. Assure that your family won’t outgrow the property
  3. Locate in a desirable neighborhood
  4. Combine modern amenities with the vintage aesthetic of the home
  5. Improvise and create the home of your dreams

With all of these advantages in mind, it’s quite easy to recognize why financing a fixer upper home is a great opportunity. Now let’s move on to the types of financing that you can get for those worn-down houses.

Questions to Ask Yourself

Before we get to the various types of financing opportunities, you should consider if financing a fixer upper is even for you. This is by no means to discourage you, on the contrary, these questions will help you ensure that you are fully ready.

Do I have the financial resources? This is a given, but it’s worth mentioning. Ensure that you have enough savings and income to pay back the financing option, in addition to covering the renovation costs.

Do I have time to invest? A fixer upper takes time and effort. You don’t simply finance it and have somebody do everything for you. You have to be flexible with your schedule to meet with agents, contractors, consultants, and more — so keep that in mind.

Will the renovation go beyond the market value? When financing a fixed upper, people often realize that they’re spending more than they thought they would. This is one of the reasons people don’t finance homes that need renovations. A proper appraisal should help

Do I have to contract the work? If you don’t have construction skills or the financing loan requires a contractor on-premise, you will need to hire somebody who is licensed. Do you have the money to cover their work?

These are just some examples of questions that you should truly consider. However, there are myriad of others that we didn’t mention, and it’s up to you to determine them based on your specific circumstances.

FHA Standard 203(k) Rehabilitation Mortgage

This is a type of loan program for renovations. It’s well-known among first-time buyers who are interested in buying worn down properties. This type of loan will often include financing for both the initial purchase and the required repairs, allowing you to make necessary changes immediately after closing on the transaction.

The primary benefit of this program is the flexibility of choice. You can make both major and minor repairs, as well as full-fledged remodeling. Nonetheless, it’s important to consider that the loan itself is only available to people who are financing at least $5,000 in renovation value.

Some of the other requirements are:

  1. No larger than a two-unit primary residence
  2. Work must be complete within 6 months
  3. Renovation work must begin within a month of the agreed date
  4. Funds cannot be used for luxury objects
  5. A general contract with license must do the work
  6. Appraisal report has to cover “as-completed” value 

The 203(k) mortgage has a wide scope, covering the potential reason why buyers avoid fixer uppers — the question of where to live during the renovation. Because of the 6-month work completion limit, a borrower can negotiate housing expenses to live somewhere else in the meantime. The program can also be used for refinancing existing properties.

Financing A Fixer Upper: HELOC

Another way of financing a fixer upper is to get a home equity line of credit. In this case, you must be careful and make sure that you will reside in the home for a long time. Otherwise, you might find yourself in over your head with the mortgage if the real estate market crashes.

In any case, a HELOC can provide a homebuyer with cash for the home remodel and also allow them to use home equity for repair costs. In general, a HELOC interest rate is significantly higher than a regular long-term mortgage.

If you choose a HELOC, make sure to read the fine print. Look for pre-payment penalties, how long you can keep the credit open, and other important factors.

Construction Loan

Another method for financing a fixer upper is getting a construction loan. Construction loans are typically issued for a brand new project, but if you’re looking to completely renovate the fixer upper, the loan might ensure yours have full borrowing power.

The bank would lend you money with a construction loan, which would be based on the appraised “as-completed” value of the future home.

Typically, a construction loan has locked rates for 6 to 18 months. After that time, you would pay interest only on the amount paid by the bank for the loan issuance.

When construction is finally complete, the bank would switch the construction loan to a regular mortgage. You could also try a reverse mortgage, which would help you get extra cash out of your current home.

Refinance Current Home

If you own a current home, you could refinance it. If you’ve been living in the home for a long time, and you need many upgrades, this might be the golden opportunity for you. 

Refinancing is not for every homeowner, let’s be honest. You must have considerable equity in the home before even considering it. And you would have to be very cautious and keep a close eye on the value of the home while it changes with the market. 

Employing the use of a cash-out refinance will help get a lower interest rate, which means you can start working on the fixer upper immediately.

If you choose to go this route, make sure to pay attention to the changing terms of the refinance mortgage. Are you extending the loan to over 30 years even though you’ve paid off several from the current mortgage? Are you able to find a shorter mortgage term or a lower rate of interest, and still have the same monthly payments?

Without considering this information, you might be genuinely surprised to see how expensive the original loan can get.

Supervision & Appraisal

Another thing to consider is the fact that renovation loans require additional appraisal and supervision. These are designed with the lender’s investment in mind, as well as your own.

For instance, the standard FHA 203(k) requires you as the homebuyer to employ the services of a consultant from the Department of Housing and Urban Development. This consultant will oversee contractor plans, approve plans, inspect the property after each completed phase.

You can also employ the services of a private appraiser who will confirm the materials and workmanship is completed as per the agreement, and that the renovated home is living up to the estimated value.

These hurdles might seem to be daunting, which they are, but they will ensure that your decisions are clear, considerate, and efficient.

Fixer Upper Funding

Now that you know the basic requirements for financing a fixer upper and the questions you need to ask, you are well prepared to finally jump and get yours funded. 

If you’re underwhelmed with the current financing options, and/or you want to fix and flip these homes, you should consider working with us. 

We provide full-scale bridge financing, ground-up construction loans, and fix & flip financing. If this sounds like something you want to learn more about, get in touch with us and we will happily accommodate your needs.

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