{"id":1325,"date":"2021-03-31T10:00:09","date_gmt":"2021-03-31T14:00:09","guid":{"rendered":"https:\/\/www.deeds.com\/articles\/?p=1325"},"modified":"2024-04-25T23:20:02","modified_gmt":"2024-04-26T03:20:02","slug":"buying-a-fixer-upper-what-are-the-best-financing-options","status":"publish","type":"post","link":"https:\/\/www.deeds.com\/articles\/buying-a-fixer-upper-what-are-the-best-financing-options\/","title":{"rendered":"Buying a Fixer-Upper: What Are the Best Financing Options?"},"content":{"rendered":"\n
\"Image<\/figure><\/div>\n\n\n\n

So, you\u2019ve found a diamond in the rough. After major\nrenovations, it will be the perfect home for you. What kind of financing will\nyou need to make it happen?<\/p>\n\n\n\n

There are several ways to go here. Let\u2019s check out the\nvarious rehab loans that can enable you to create and customize your future home,\nor upgrade the home you have now. <\/p>\n\n\n\n\n\n\n\n

Key Renovation Loan Choices: An Overview<\/h2>\n\n\n\n

Here are your key options for financing renovations when you\nbuy or own a home:<\/p>\n\n\n\n

The FHA 203(k) loan. <\/h3>\n\n\n\n

Did you know? The ever-helpful Federal Housing Administration\nlets borrowers combine renovation costs with their mortgage loans. For the FHA 203(k)\nloan, a buyer can make a down payment as low as 3.5% to purchase a fixer-upper.\n(The down payment can vary depending on the borrower\u2019s credit profile.) In\nreturn for this low entry threshold, a buyer should anticipate paying private\nmortgage insurance (PMI)<\/a>. The buyer also needs to anticipate closing\ncosts \u2014 whether they will be paid up front, or rolled into the loan and subject\nto interest. <\/p>\n\n\n\n

The 203(k) renovation funds are put into escrow. The\nborrower must tap them in the first 30 days after closing. By law, within a\nsix-month window, the borrower\u2019s upgrades will be finished.<\/p>\n\n\n\n

The conventional renovation loan. <\/h3>\n\n\n\n

With a conventional loan option, too, the buyer can blend\nthe cost of renovations into a mortgage loan. A buyer of a $200,000 condo who\nanticipates putting $100,000 into upgrades is therefore looking at a $300,000\npurchase. (When the lender looks at the value of the home as an asset, it\nconsiders the worth of the home as it will be, once it\u2019s upgraded.) With the conventional\nrenovation loan, the buyer would typically put $60,000 on the home as a 20%\ndown payment to obtain the combined loan.<\/p>\n\n\n\n

The home equity line of credit (HELOC). <\/h3>\n\n\n\n

Of course, it is always possible to buy now and finance your\nupgrades later. Maybe the renovations don\u2019t all have to be done up front. Once a\nhomeowner builds up some equity, that value can be tapped to finance the\nrenovations.<\/p>\n\n\n\n

\u261b<\/em><\/strong>\nThe interest on a HELOC can be a tax deduction, if the reason for taking\nout the loan is to improve the real estate\u2019s value. Find out more from\nDeeds.com about home equity lines of credit<\/a>, and how\nto use them wisely.<\/em><\/strong><\/p>\n\n\n\n

In the rest of this article, we\u2019re going to focus on the\ncombined rehab-mortgage loan application. If you apply for a loan to cover both\nthe purchase and the upgrades, you can buy a home to renovate from the\nbeginning to fit your own style and objectives. You can purchase it at a lower\nlisting price than its local peers. And while it could take two months or more\nto get to closing when you\u2019re financing both the home itself and the renovations,\nthe rewards are significant. First, you\u2019ll have all that financing done in one\nfell swoop! Most important, you\u2019ll have an experienced lender overseeing the\ncontracts for your major home improvements. <\/p>\n\n\n\n

So, let\u2019s dive in to a well-known rehab loan opportunity:\nthe FHA 203(k).<\/p>\n\n\n\n

FHA 203(k) Renovation Loan<\/h2>\n\n\n\n

Commonly known as the rehab loan, this FHA-backed offering lets buyers and owners finance \u2014 or refinance \u2014 for the whole enchilada: mortgage loan plus renovations for their homes. In addition to selecting (or already owning) a home in need of upgrades, the qualifying homeowner must fit several criteria set forth by the Department of Housing and Urban Development (HUD). Basically, this entails meeting all the credit and income standards set by a qualified lender. Generally, though, approvals for FHA loans can be easier to get than approvals for conventional loans.<\/p>\n\n\n\n

The loan you obtain will be one of two types of available 203(k) loans<\/a>. As explained by Amerifirst Home Mortgage, the two types are:<\/p>\n\n\n\n