It takes a special person to see the potential in a home that’s in need of serious rehab. If you’ve got your heart set on buying a dream fixer-upper — but don’t have the savings to cover both a down payment and a renovation — there are loan products out there that could help you make your dream a reality.
Consider a loan with a built-in reserve
The Federal Housing Administration (FHA) 203(k) rehabilitation loan or Fannie Mae HomeStyle Renovation Mortgage could be good financing options for buyers seeking fixer-uppers. These loans allow you to purchase the home with a reserve that’s put in escrow to fund renovations.
One caveat: There are strict guidelines, and it’s important to understand how these loans work if you’re considering a handyman special.
“These are good for people who can afford the mortgage payment, but they don’t have a lot of cash on hand to be able to pay for these renovations outright,” says Cara Ameer, broker associate and real estate agent at Coldwell Banker Vanguard Realty based in Ponte Vedra Beach, FL. “If the scope of the renovation is big and it’s a total overhaul costing six figures, you probably should do some kind of renovation loan.”
First-time homebuyers with limited budgets who want to live in a particular area can usually benefit from buying a less expensive home that’s a fixer-upper — and these loans make it feasible. “[A 203(k) or HomeStyle conventional renovation mortgage] allows consumers to go in and purchase the home and work with the contractor — the amount to renovate can be included in that one loan,” says Bill Trees, national renovation more information program manager at Wells Fargo Home Mortgage.
If you’re looking to make minor changes, however, borrowing money through a renovation loan may not make the most financial sense.
How do these loans work?
Once the mortgage closes, one portion pays for the house while the other is deposited into an escrow account.