Have you ever fantasized about knocking down walls and making a distressed home a dream home? You’re not alone. Buying a fixer-upper property might be a good investment. However, the hard part is paying for it all. Most traditional home loans won’t allow you to finance the cost of significant repairs and renovations when you buy a home. Fortunately, you have options. This guide will highlight the loan options available for a fixer-upper mortgage and explain what you should consider before you tackle buying a fixer-upper.
Both Fannie Mae and Freddie Mac have loan programs designed for homebuyers who want to purchase and renovate a home. Keep in mind that these two government-sponsored entities don’t directly lend money to consumers, they only buy mortgages from other lenders. So, you’ll have to work with a private mortgage lender like Primary Residential Mortgage who provides conventional mortgage products.
Fannie Mae’s HomeStyle® Renovation Mortgage allows homebuyers and existing homeowners to combine their home purchase or refinance with the financing needed for renovations and repairs into one single mortgage. That way you don’t have to get a secondary loan, such as a home equity loan or line of credit. HomeStyle loans are available in 15- and 30-year fixed-rate mortgage terms, as well as adjustable-rate mortgages. For a single-family home, you might be able to qualify for a down payment of as little as 3% depending on your credit score.
To finance the extra costs associated with renovations, home borrowers frequently choose to utilize Fannie’s Community Seconds® Mortgage on top of the HomeStyle® loan. Together, you can finance up to 105% of the home’s purchase price.
Freddie Mac’s Renovation Mortgage program also caters to homebuyers and homeowners looking to rehabilitate, renovate, repair or restore an existing home through a purchase or refinance. Renovation loans are available for fixed-rate mortgages with 15-, 20- or 30-year terms and also include adjustable-rate mortgages. Borrowers must contribute a minimum down payment of 5% for a single-family home, 15% for a two-unit home and 20% for three- or four-unit homes. The maximum loan to value ratio (LTV), or the most you can borrow, is based on the smaller amount of either the purchase price plus renovation costs, or the appraised value of the home after the renovations are completed.
The U.S. Department of Housing and Urban Development’s Federal Housing Administration provides 203(k) loans to homebuyers and existing homeowners who want to purchase or refinance a home and renovate it with a single mortgage. An FHA 203(k) loan provides a single, long-term, fixed- or adjustable-rate mortgage that covers both the purchase and rehabilitation of the home. Because the mortgages are federally insured, lenders are sometimes more willing to provide loans. This is a good option when the initial condition and value of the property wouldn’t be good enough for traditional lending.
Now that you know your options for how and when to buy a fixer-upper home if you would like to learn more, contact Primary Residential Mortgage. One of our loan specialists will patiently explain all of the programs and help you find the right option for you.
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