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What is the Right Mortgage for Buying a Fixer-Upper?

What is the Right Mortgage for Buying a Fixer-Upper?

February 13th, 2019 | FHA Loans, Purchasing a Home

You have found your dream house but it will take significant work to make it a home. You do not have cash in savings to pay for both a down payment and the repair costs. Not to worry - this is not a hopeless situation. Fortunately, there are two types of mortgage loans available for just this scenario:  The Federal Housing Administration (FHA) 203(k) rehabilitation loan or Fannie Mae HomeStyle Renovation Mortgage.

FHA 203(k) Mortgage

The Federal Housing administration has provided a home loan that allows buyers to borrow enough money to cover the price of the home plus the estimated repair costs if that total is no more than 110% of the estimated appraised value of the home after the proposed renovations.  

There are several requirements for FHA 203(k) loans. First borrowers must provide a down payment of at least 3.5% and have a minimum credit score of 580. (Although if you put down at least 10% for the down payment, the FHA will accept credit scores as low as 500.) Because it is an FHA loan, borrowers will also be required to pay 1.75% of the loan amount upfront as mortgage insurance and 0.85% on the principal balance for insurance annually for the life of the loan. In order to avoid paying mortgage insurance forever, buyers could consider refinancing sometime after the renovations are completed.

The property must cost less than the FHA mortgage limit for the area and the repairs must total more than $5,000. Almost any type of repairs are allowed, including demolishing a home and fixing up the foundation before rebuilding.  This type of loan is not generally for do-it-yourself buyers though. Borrowers are required to hire a 203(k) consultant or contractor who will oversee all the renovations.

Fannie Mae HomeStyle Renovation Mortgage

This loan is great for those who have some major renovations to do as home buyers can borrow money to cover repairs that cost up to 50% of the completed property appraised value. The renovations can include almost anything: remodeling, repairs and even energy efficiency enhancements, as long as the improvements are permanently affixed to the property and increase the home value. 

The loan amount will pay for labor and material costs as well as inspections, permits and licenses, and architecture and engineering fees. In addition to all of that, the loan can also include an optional 10% reserve for contingencies. The lender will oversee all renovations.

Investors are also allowed to take out HomeStyle Renovation mortgages with down payments of 15% or more. Investors may not borrow 203(k) loans.

The requirements for HomeStyle Renovation loans include down payments of at least 5% and credit scores of 680 or more. Property prices must fall under the conventional mortgage limits for the area and the work must be completed in 12 months. Private mortgage insurance (PMI) will be required for any loans with down payments of less than 20%. 

If you are willing to wait a little for repairs and do the work to meet the loan standards, home renovation loans like the FHA 203(k) or the Fannie Mae HomeStyle Renovation mortgage can help you buy the fixer-upper you love.

At PRIME 1 BANCORP, LTD, we are available by phone at 630-519-5955 to answer any questions that you have about this important topic and to give you the best advice for your particular situation. Whatever you decide is best for you - we can help you.

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Prime 1 Bancorp, Ltd is not affiliated with any government organization or bank nor do we act on behalf of the FHA or VA. This material is not from HUD or FHA and has not been approved by HUD or a government agency. We are not a Federally chartered or State Chartered Bank. We are an we are an Illinois Residential Mortgage Licensee by the Office of Banks and Real Estate License #MB.6761138, a Colorado Registered Mortgage Brokerage by Division of Real Estate, a Florida Residential Mortgage Brokerage Licensed by the Office of Financial Regulation License #MBR1930 dba Prime 1 Mortgage Inc, a California CFL Licensed Mortgage Brokerage by Department of Business Oversights 60DB055973 and a Texas SML Licensed Mortgage Brokerage by the Texas Department of Savings and Mortgage Lending. Prime 1 Bancorp, LTD Corporate Office is located at 2720 S. River Rd Suite 50, Des Plaines, IL 60018 our Toll Free Number is 888-205-3737. NMLS: 1434638

Loan product availability is subject to qualification of the borrower and loan approval after full review of the file. Not every applicant qualifies or is eligible for every loan program. Some loan products may not be available in all states. Loan approval, note rate and annual percentage rate are dependent on factors including, but not limited to, credit, collateral, income, assets and overall financial history. Not all applicants will be approved for a loan. All loan programs, terms and annual interest rates are subject to change without notice. NMLS: 1434638