If you’ve fallen in love with a fixer-upper, you may find that it’s difficult to find financing. Your standard conventional loans or even government-backed loans won’t touch it. The home must be able to pass an appraisal to get this type of financing. So what type of loan can you get that will allow you to buy a home in less than perfect condition?
There are two answers – the FHA 203K loan and the Fannie Mae HomeStyle Renovation loan. These loans provide you with funds to buy the home and fix it up. You don’t have to worry about qualifying for a second mortgage or charging the debt on your credit cards. Keep reading to learn how you can use these loans for your next fixer-upper purchase.
The FHA 203K Loan
There are two types of FHA 203K loans you can obtain when you buy a home that needs renovations. The first is the full 203K loan. With this loan, you can make as many changes as you want to the home. You can borrow as much as 110% of the after-repaired value of the home as long as the amount does not exceed the FHA loan limits for the area. You can make structural changes to the home and even add rooms or other additions to the home.
You’ll put down 3.5% of the purchase price of the home (not including renovations) and finance the rest. If you are unable to live in the home right after the closing, you can include enough money to cover the mortgage payments for those six months so that you have money to live elsewhere.
The lender plays a pivotal role in the FHA 203K loan process. They not only approve the contractor, but they also inspect the work to make sure it’s done right. The lender will likely employ a loan consultant, which you will have to pay for, in order to oversee the loan and the work. The loan consultant works as the middleman between you, the lender, and the contractors to make sure all of the work is done as promised.
The FHA Streamline 203K Loan
The FHA streamline 203K loan also provides funds to help you fix up the home, but it has limits. You can only borrow up to $35,000 for the renovations. In addition, you cannot make any structural changes to the home with this program. It’s a program better suited for cosmetic changes or minor improvements to the home. With the streamline 203K, you must be able to live in the home while the work is being completed. The full 203K loan allows you to live elsewhere for 6 months.
The one condition that remains the same for both the full and streamline 203K loan is the timeline. All work must start within 30 days of the loan closing. In addition, all work must be complete within 6 months of the loan closing.
The FHA 203K loan requires the same 3.5% down payment and the lender will need to approve any contractors on the job before closing on the loan. The one difference, however, is that you won’t need a loan consultant for this loan. You can oversee the work yourself and approve the final work so that the bank can disburse the final funds.
The Fannie Mae HomeStyle Loan
The Fannie Mae HomeStyle loan requires a 5% down payment and gives you a fixed rate mortgage. Fannie Mae allows you to have 12 months to get the work done and allows many different types of renovations as long as they all add value to the home when it’s all said and done.
The lender will preapprove all work that you intend to have done before the closing. This way they can make sure the work is done on time and correctly, before they distribute any funds. You will be able to borrow as much as 95% of the after improved value of the home, according to the appraiser.
The Fannie Mae HomeStyle loan requires a credit score of at least 620, which is higher than the FHA’s 580 minimum. The Homestyle loan also requires PMI if you put less than 20% down on the home, just like any other conventional loan would charge.
One major difference between the Fannie Mae and FHA loan is the type of changes you can make. The FHA restricts the changes to those that are necessary or add value to the home. They do not allow you to make any luxury changes to the home. The Fannie Mae loan allows any type of changes, including luxury upgrades in any area of the home.
If you want to buy a fixer-upper, talk to several lenders about the Fannie Mae HomeStyle and the FHA 203K loan. Both loans offer the option to buy a home that otherwise would not pass an appraisal. It’s a great opportunity to buy a home for a lower price and make it look exactly how you pictured.