Financing a Fixer-Upper

When the housing market is this tight, considering a home that needs a bit of work can pay off big dividends for flexible buyers.

Let’s face it, when purchasing a new home, most of us would prefer to purchase one with upgraded kitchens and baths, a new roof, new windows, new systems, and our favorite paint colors – oh, and in the ideal location. Most of us would also like to win the lottery.

None of those are realities for most people.

The housing market continues to struggle with a level of supply that is not keeping pace with demand. Buyers are competing for too few available houses and properties deemed “fixer-uppers” get less prospective buyer attention. However, these properties have untapped potential and should not be overlooked if a buyer is willing to take on the home improvement challenge and can identify the means to finance the effort.

As different properties require various levels of effort to improve them, the methods of financing those improvements can also differ greatly. Some buyers are flush with cash and have enough to cover a large down payment, closing costs, and improvements. Others struggle with how to meet the minimum cash requirement just to purchase a home. Just as homes differ in big and small ways, buyers need financing options that differ as well. Here are some general questions to consider.

Instead of making the down payment I had planned, can I make a smaller down payment and cover the cost of improvements with the cash I have retained?

The smaller down payment means a larger loan which requires a higher monthly payment. But since we are talking about fixer-uppers, the starting price for the home is presumably lower and therefore the loan amount is lower than would be the case for a home that did not need upgrades and improvements.

Can I borrow from my active retirement account to increase my cash to cover the down payment and the costs of improvements?

Most qualified retirement programs allow active participants to borrow for the purchase of a new home. The funds available can supplement or replace other savings which can then be used to cover the cost of repairs and improvements.

Does an FHA 203K loan make sense for my particular fixer-upper scenario?

Some lenders provide FHA 203K renovation loans for home purchasers that allow them to finance 96.5% of the cost of the purchase price plus qualified improvements and renovations.

The streamlined 203K program allows for the purchase price plus non-structural renovations and upgrades up to an additional $75,000 in cost.
The full 203K program allows for a purchase with major renovations up to a maximum loan amount in the Washington metro area of $1,149,825.
The FHA programs require only 3.5% of the combined cost of the home purchase and renovations or upgrades from the purchaser.

Am I ready to take on a construction loan to turn the fixer-upper into my dream home?

Some lenders provide true construction financing which can finance anything from a major kitchen and bath renovation to buying a vacant lot and building a new home and can be an effective method to finance the complete renovation of a true fixer-upper. Often there is great value in the “bones” of the structure and the location of that structure but very little value in anything else associated with the property. A construction loan may be the best approach to acquiring and bringing new life to a tired, old, fixer-upper.

If you are lucky enough to find your perfect turn-key home in this competitive market, you can expect to pay top dollar for it. But savvy home buyers will tell you the best value is in properties that require some sweat equity and TLC. Keeping that in mind and identifying the best way to finance those efforts can open more homebuying opportunities in our tight housing market.

Please reach out to me or my colleagues at Atlantic Coast Mortgage to have a conversation about whether a construction loan works for your homebuying goals.

Brian Bonnet - Atlantic Coast Mortgage

Brian Bonnet

SVP, Sr. Loan Officer, NMLS: 224811

Atlantic Coast Mortgage, NMLS: 643114

O: (703) 766-6702 | M: (703) 304-0188

Email Me

Notice: This is an advertisement and is not a commitment to lend. Contact a loan officer today to explore the financing options specific to each borrower.