There are a ton of shows on HGTV right now about people buying a fixer upper and turning it into their dream home. Admittedly Heather and I love watching them, partly because we talk about doing it ourselves but mostly because it’s cool to see the transformation. The Realtor in me wondered how these folks are paying for it. Most people don’t have the liquid cash to make their down payment and make all the repairs. Thanks to our good friend Scott Fournier at Integrity Home Mortgage, now I know the answer.
The most common loan type used is the FHA 203(k) rehab loan. It allows purchasers to obtain contractor estimates for needs and wants which are then reviewed by an appraiser to determine if purchase value PLUS improvements will justify the total loan. Though consumers can’t be their own general contractor they do have control over picking contractors and vendors for the jobs to be completed. This loan requires a 3.5% down payment, just like FHA’s regular purchase loan called a 203(b). The process typically takes 60-90 days to close, after which repair work commences. One caveat for this type of loan, you must live in the home in order to qualify and rates are typically higher.
If you have a little more cash on hand a conventional rehab loan may be the way to go. You will most likely need 20% down including the cost of the repairs but you will avoid that pesky monthly mortgage insurance premium. This is the more likely option if you are an investor or you are not planning on living in the home.
Lastly, certain regions allow USDA loans where repairs noted by the appraiser are allowed to be escrowed at closing for quick repair afterwards. If the home appraises above sales price then the repairs may be financed in the USDA loan, however if the home does not appraise higher than sales price then these repairs would have to be paid for at closing.
If you’re thinking of taking on a project like this or would like to learn more, send us a note and we’d be happy to help.