Buying a fixer-upper can be a great way for first-time home buyers to get into the market. Or for repeat purchasers to afford a larger property or a better neighborhood. A move-in ready home can be difficult to locate these days. Especially if you’re on a budget, due to the low inventory of homes for sale.
Fixer-uppers are generally existing single-family homes that require upgrades or repairs. They typically sell for less per square foot than homes in good condition. But before you go bargain searching, you should know what you’re getting yourself into. Renovations aren’t as simple as they appear on TV.
Simple jobs can quickly become complicated once demolition begins. If prices end up being greater than expected, completing your to-do list may take longer than expected. Consider these factors to see if buying a fixer-upper is good for you.
OPTIONS FOR A MORTGAGE ON A FIXER-UPPER
Renovation loans are mortgages that allow you to finance a home while also making upgrades. You can pay off renovations over a longer period of time and at a lower interest rate with a renovation loan than you can with other types of financing. Among the possibilities are:
FHA 203(k)
FHA 203(k) loans are offered by the Federal Housing Administration. They allow for lower income and credit scores than traditional mortgages. They may be utilized for a wide range of home renovation projects.
VA Loans
The Department of Veterans Affairs recently amended its VA loan standards to include house acquisition and rehabilitation. A VA-approved contractor is necessary, project eligibility is restricted, and your lender may impose a construction fee.
Home-Style Mortgages
These are backed by Fannie Mae, demand higher credit scores than FHA 203(k) loans. However, practically any upgrade, even “luxuries” like a pool or landscaping, is eligible.
CHOICE Renovation Loan
This Freddie Mac-guaranteed loan provides for modifications to help homes resist natural disasters. Borrowers can also get a down payment credit by doing repairs before closing.
A fixer-upper mortgage can also help cover your mortgage payments. If you have to move while modifications are being made, and it can contain extra funds in case the project costs more than expected.
THE AMOUNT OF WORK REQUIRED AND YOUR BUDGET
There are two types of disrepair, imperfect shape and absolute disrepair. Before you make an offer on a fixer-upper call a skilled contractor. A contractor can estimate the cost of all the work that needs to be done. The house that’s right for you is determined by your abilities, timeline, and how you want to fund the modifications.
You’ll have to pay for upgrades with cash, a credit card, or a personal loan if you secure a typical mortgage. These financing options may impose a low price ceiling and confine you to one project at a time. A home in need of minor repairs may be ideal.
A renovation loan can help you stretch your budget and handle multiple tasks at once. This will make it more affordable to acquire a home that needs a lot of work. However, these fixer-upper mortgages may have restrictions on the types of changes you can do and who may do them.
Whether you do it yourself or hire a pro, don’t be shocked if you hit some bumps along the road. Renovations are inherently time-consuming and always take longer than you expect.
Prepare for delays during the mortgage offer process if you’re looking at foreclosures. They often need more work. When it comes to bank-owned properties, you’ll be negotiating with the bank that owns the property. Your offer may be rejected multiple times. This makes for a slow start to a project that could take months to finish.
ADDITIONAL INSPECTIONS AND EVALUATIONS
Extra consultations, inspections, and home assessments are frequently required for renovation loans to protect both the lender’s and your personal investment. For example, a conventional FHA 203(k) loan requires you to employ a consultant from the Department of Housing and Urban Development who will approve your designs, coordinate contractor payments, and inspect the property once each step of work is completed.
You could go through several appraisals if you use the CHOICERenovation loan’s sweat equity clause. The appraiser will make sure that the labor and materials match what was promised in the contract, and that the newly remodeled home is worth what it was estimated to be worth.
These extra obstacles can be aggravating, but they help to guarantee that the work is completed on time, on budget, and adds value to the home.
The pleasure of constructing a house that is truly yours
There’s no denying that buying a fixer-upper requires more effort than buying a move-in ready home, but the payoff will almost certainly be worth it. When the dust settles and the paint dries, your home will be filled with personal touches rather than the relics of another’s life. A home that is exactly how you want it without the high cost of new construction? That does sound like a dream home.
Summary: What to Know Before Buying a Fixer Upper
Buying a fixer-upper can be a great way for first-time home buyers to get into the market, or for repeat purchasers to afford a larger property or a better neighborhood. A move-in ready home can be difficult to locate these days, especially if you’re on a budget, due to the low inventory of homes for sale.
If you have any questions about what to know before buying a fixer upper contact me today.