Can u afford a fixer upper
By Chris Birk October 7,
2014
But the “buy low, sell high” ethos of fixer-uppers isn’t exactly a
guarantee. There are plenty of people who snagged the worst house in a great
neighborhood and turned it into their dream home. You’re just as likely to find
overworked and overspent homeowners ready to run from their money pits.
Committing to a fixer-upper is a big decision, one that can impact your
financial picture for years to come. Before you start swinging a hammer, you’ll
first need to find a way to finance your purchase.
You may need a specialized mortgage product to buy a fixer-upper.
Some lenders and loan types want properties in “move-in ready” condition, which
can obviously pose a problem.
Here are a few options to consider.
FHA 203k
The Federal Housing Administration offers a government-backed rehab loan
that allows buyers to finance renovations based on the property’s projected
value. There are two distinct types of 203k loans: a
streamline version and the standard.
Buyers using the streamline option can add up to $35,000 to their loan to
make non-structural repairs, like new carpet, paint or even a kitchen remodel.
The standard 203k loan gives borrowers more leeway in terms of how much they can
borrow and how they can use the money.
Repairs must be completed within six months. Homebuyers can also finance up
to six months’ worth of mortgage payments, a bonus that can help cover costs if
you need to live elsewhere during the renovation.
The FHA 203k loan program can be a great fit for low- and middle-income
borrowers. Credit and down payment benchmarks (3.5%) are lower for FHA loans.
But there are also some downsides. FHA loans carry costly mortgage insurance and
limit borrowers in most parts of the country to a max loan of $271,050.
Fannie Mae HomeStyle
These rehab loans also let qualified buyers finance remodeling costs, based
on the “as completed” worth of the home.
Unlike with 203k loans, borrowers can use Fannie Mae’s HomeStyle
program to make “luxury” improvements like pools and landscaping. The
only caveat with repairs is that they’re permanent and increase the property’s
value.
Getting one of these loans can be a bit tougher. Conventional loans usually
require higher credit scores and at least 5% down. But your borrowing reach can
extend because these loans are linked to the conforming loan limit, which is
currently $417,000 in most places.
Buyers who plan to live in the home can do some of the renovation work
themselves, as long as financing for the DIY portions doesn’t exceed 10% of the
home’s projected value.
Conventional Renovation Loans
Some conventional lenders offer rehab loans outside of these two programs.
Rules and requirements will vary. As with any type of home loan, it pays to shop
around.
Some lenders won’t allow you to do any of the work yourself. Others will
require you to have several months’ worth of mortgage payments in reserve.
Knowing what shape your credit is in before you begin the mortgage process
can help you determine which loan option will work best for you. That means
pulling your credit reports to look for errors or other issues that need to be
addressed, along with your credit scores to see where you stand in general. You
can get your credit reports for free
once a year from each of the three major credit reporting agencies,
and you can use a free service like Credit.com to see your
credit scores.
What You Can’t Afford
Regardless of the financing path you choose, make sure you pay for a
professional home inspection along with the home’s appraisal. Home inspections
are important even when you’re buying a nearly new home that’s move-in
ready.
They’re critical when you’re considering a property that needs
work. You can retrace the inspector’s steps later with a contractor
to get a good sense of what it’ll cost to resolve any problems.
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