As a first-time homebuyer, you can come completely overwhelmed at the choices you have. Do you want a single-family home or condo? Do you want to live in the city, suburbs, or a rural area? Do you want a home that’s ready to move into or one that needs some fixing up?
These are just a few of the questions you’ll ask yourself. But, the one you want to focus on first is whether you should focus on move-in ready homes or if a fixer-upper is a good idea for your first home.
Before you choose the fixer-upper, you need to ask yourself some questions.
Do You Have the Money?
We know, fixer-upper homes are usually much cheaper than move-in ready homes, but there’s more than meets the eye when you buy a home. Your spending doesn’t end when you close on the loan. You then have to work on the home itself to make it livable, especially if you certified with the mortgage company that you would occupy the home soon.
If you choose the fixer-upper, you need to know how much money you’ll need to fix it up. If you focus solely on the purchase price, you could find yourself facing an unpleasant surprise. Unless you know a close estimate of how much it will cost to fix up the home, you shouldn’t commit to buying it. Once you get that estimate, you should increase by at least 20% for contingency funds. You never know what you or the contractors will find once they start the work.
Stop and think about how much money you’ll have left after making the down payment. If you are using FHA 203K financing, which most borrowers need when buying a fixer-upper, you’ll need at least 3.5% down on the home, plus the cost of the closing costs and mortgage insurance. If the seller isn’t helping you with closing costs, you should expect to need between 5% -6% of the loan amount in closing costs.
How Bad is the Home’s Condition?
Next, consider just how much work is necessary for the home to be livable. Are the issues structural or cosmetic? If they are structural, you’ll need extensive financing and you’ll have to use a full FHA 203K, which means stricter requirements and the required use of an FHA 203K consultant. You may also need somewhere else to live while the work is completed. Structural changes are usually expensive and will require more financing.
If the issues are more cosmetic, or not structural, they may be less expensive and easier to get done. You may even be able to live in the home while you fix it up. If the home passes the FHA appraisal or another appropriate appraisal, you can live in the home and fix it at the same time. You’ll still have to abide by the same deadlines, but at least you’ll have a place to live.
Do You Have Contractors?
The FHA usually requires borrowers to hire professional contractors to do the work on the home. If you think are able to do-it-yourself, you’ll need to prove that you have the skills and the time. The FHA only allows you six months to get the work done. If you can’t prove that you have the time to complete the work in that time, you’ll have to hire someone.
If you have to hire out, it will obviously cost you more money. You’ll also have to find contractors that are licensed and insured. Lastly, they must have the time to complete the project within the next six months.
If this all sounds like a headache, it can be! If you hire a 203K loan consultant, he/she can help you through the process, but they are yet another expense for you. Typically, you’ll pay a few thousand dollars for this type of consultant.
Will the Improvements Make the Home Worth More?
Finally, you need to consider how the improvements will affect the home’s value. Will it increase? You won’t know until you talk to an appraiser. Once the appraiser conducts the appraisal on the property as-is, he can take into consideration the improvements you will make to the home to give you an ‘after-repair value.’ If this value isn’t high enough, you may not be able to get financing for the improvements. Typically, you can borrow up to 110% of the new and improved value of the home.
So should you buy a fixer-upper if you are a first-time homebuyer? It depends on your situation and the condition of the home. No matter who you are, make sure to give the decision careful thought. Really think about what goes into it and see if you have the money and the patience to withstand it all.