How to Finance Home Renovation for a Fixer-Upper

Home-Renovation

Buying a home that needs a little TLC saves you money upfront but more often than not, the home needs to be renovated if not rehabilitated so that it’s livable. If you’ve recently purchased a fixer-upper, you’ve likely already started a list of projects that you want to tackle. While some of the fixes only cost a couple hundred dollars, others may range in the thousands.

For the more expensive projects, you’ll likely need to finance the costs. Here are the various options to consider for financing home renovation for a fixer-upper.

FHA 203(k) Mortgage Program

The FHA 203(k) Mortgage Program is beneficial in many ways. This type of loan is ideal for homeowners who don’t have a lot of money for a down payment on a home as well as for borrowers who have an average or below average credit score. In order to quality for this loan, your credit score must be at least 580. For scores lower than 580, you’ll be expected to provide a 10% down payment.

Under the FHA 203(k) Mortgage Program there are two loan options.

Standard 203(k) Loan

The Standard 203(k) loan can be used for any home repairs or improvement. The loan can even be used to reconstruct a demolished home, assuming the foundation is sound and remains intact. To qualify for this loan:

  • The home must be at least a year old

  • Repair costs must total at least $5,000

  • The project has to be determined to be financially feasible

Before the FHA will approve this loan, you must meet with a 203k consultant to inspect the property and to prepare architectural exhibits. The consultant will also oversee the project.

With the Standard 203(k) loan, you can borrow up to 100% of your house’s value if the repairs increase the appraised value.

Limited 203(k) Mortgage

The Limited 203(k) Mortgage loan is reserved for minor remodeling projects. This loan is used for renovations that don’t require structural modifications. The loan can be used to replace or repairs gutters, the roof, HVAC systems, plumbing, flooring, and much more. You can also use the loan to finish the home’s basement, to remodel the kitchen, or to have all new appliances installed.

With this loan you can borrow the purchase price of the home with an additional $35,000 towards upgrades, improvements, and repairs.

Fannie Mae HomeStyle

Fannie Mae HomeStyle is another government-backed loan option that allows you to borrow up to $417,000 for home repairs and renovations. To quality for this loan, you need to have a solid credit standing and must have cash for a down payment. The loan allows you to borrow more than 80% of the home’s future value.

The Fannie Mae HomeStyle loan offers good interest rates and is a conventional loan. There’s also no worry of PMI if you have at least 20% equity in the home.

Non-Government Options

If you don’t qualify for a government-backed loan, there are other providers, such as Hearth, for home renovation loans to consider.

Personal Loan

Using a personal loan to finance the cost of repairing a fixer-upper is a good option if you don’t want to put collateral towards the loan. Personal loans are relatively easy to get approved for, assuming you have decent credit and stable income. These loans also tend to have high loan amounts.

The biggest issue with using a personal loan to finance your home renovation project is the high interest rate. Most interest rates start around 8% and can go into the double digits. This means through the life of the loan you can expect to pay hundreds if not thousands of dollars towards interest.

Home Equity Loan

With a home equity loan, your home is used against the loan as collateral. This means that if you default on the loan, the lender could own your home. A home equity line of credit is a one-time loan that has a set interest rate and monthly payment.

Similarly to a home equity loan, you may also want to consider a home equity line of credit (HELOC). A HELOC offers a revolving balance and is best for homeowners that have several expensive projects or one big home renovation.

Construction to Permanent (C2P) Loan

A construction to permanent (C2P) loan allows borrowers to finance the cost of building a new home, including a tear-down, as well as the cost of significant renovations. The loan involves a single mortgage that is made up of two parts. The first half is the construction loan which is short-term and is only used to finance renovation costs. The second half is a permanent mortgage that replaces the construction loan when renovations or building is complete.

With this type of loan, borrowers have one mortgage closing process instead of two. This highly reduces closing costs and allows borrowers to lock-in a low interest rate well before the project is completed.

Conclusion

If you’ve recently purchased a fixer-upper, the next step is renovating, upgrading, and rehabilitating. Keep these loan options in mind to finance your upcoming projects to turn your fixer-upper into your dream home! What is the next improvement project that you want to start on your home? Leave us a comment in the section below.

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