The perfect house is sometimes the most “imperfect” house you can find. That’s the mentality of buyers who purchase and renovate fixer-uppers. With their lower price points, these properties let you build up sweat equity. However, you’ll need to be okay with potentially higher interest rates and stricter lender oversight when financing a fixer-upper.Â
The 7 Types of Fixer Upper Loans
Buyers have a roster of options when looking for something beyond a conventional mortgage or FHA loan to finance a fixer-upper. However, not all lenders offer all loan types. Thus, the first step before rolling up your sleeves to dig into renovations is finding a lender that offers rehab loans.
#1 Fannie Mae HomeStyle Renovation Loan
HomeStyle Renovation financing allows borrowers to renovate any portion of a home with no minimum dollar amount. Loan amounts can be used toward bathrooms, roofs, landscaping, or the addition of an accessory dwelling unit (ADU) or in-law suite. You even get to choose your own contractor or subcontractor.
In general, borrowers like Fannie Mae HomeStyle Renovation loans because interest rates tend to skew lower compared to personal loans and other financing options. Fannie Mae prioritizes fast turnaround times to help borrowers get funds delivered in time to start projects immediately. Here’s a look at the three steps:
- Phase 1: As the borrower, you’ll select your contractor(s) and submit your renovation plans to your lender. Your lender then reviews documents, orders an as-completed appraisal to assess your mortgage amount, confirms financial information, and determines a loan amount.
- Phase 2: Upon approval, you’ll move forward with your renovation loan agreement and closing. Your lender then places the funds into a custodial account that Fannie Mae will serve throughout the renovation process. You can now move forward with your renovations!
- Phase 3: Upon receiving your final draw request, the completion phase begins. Your lender will relinquish oversight once the final inspection, appraisal certificate, and title verification have been complicated.
#2 Freddie Mac CHOICERenovation Loan
CHOICERenovation uses a single-closing transaction to give borrowers greater convenience and cost savings. CHOICERenovation can be used with qualifying fixed-rate and adjustable-rate mortgages that include super conforming, Home Possible®, HFA Advantage®, and HomeOne loans.
Maximum renovation costs through this program can total up to 75% of the property’s as-completed value.
#3 Freddie Mac CHOICEReno eXPress Loan
CHOICEReno eXPress is an extension of CHOICERenovation that’s designed for borrowers looking to finance smaller-scale renovations. Properties in designated Duty to Serve (DTS) high-needs areas can qualify for loans up to 15% of the value for purchase transactions and no-cash-out refinance mortgages.Â
#4 Limited FHA 203(k) Loan
Offered through the Department of Housing and Urban Development (HUD), the Limited 203(k) program allows buyers to finance up to $35,000 into their mortgage to pay for repairs, improvements, or upgrades. For buyers, this can include everything from remodeling to full exterior painting.
#5 Standard FHA 203(k) Loan
For buyers looking for a more extensive option for financing a fixer upper, the Standard 203(k) program is for major rehabilitation on single-family properties.
This includes major renovations and structural changes. The minimum rehab cost with Standard FHA 203(k) financing is $5,000. However, the property’s total value still needs to fall within the local area’s FHA limits.
#6 VA Renovation Loan
For those who qualify for a VA home loan, the VA Renovation Loan is a loan that allows buyers to purchase and renovate single-family homes without preset loan limits. Borrowers can generally be approved for the value of the property based on an appraisal.
Stipulations to know about include that you must use a contractor or builder with a VA builder identification number, the property must pass VA appraisal and inspection upon project completion, and all construction must be completed within 120 days of closing.
#7 USDA Renovation Loan
USDA renovation loans allow you to unite a home’s purchase price and renovation costs into a single fixed-rate mortgage using all of the same perks and guidelines of a traditional USDA loan. That includes being able to accept up to 6% of the sale price in seller concessions.
USDA renovation loans can be full or partial. With a Limited USDA Renovation home loan, borrowers can make repairs and improvements up to $35,000. Improvements with a Limited USDA Renovation home loan often include roofs, gutters, existing HVAC systems, flooring, painting, plumbing, and electrical systems.
Full USDA Renovation home loans don’t have maximum limits. Approved loan amounts instead follow Federal Housing Finance Agency (FHFA) conforming loan limits. In order to be approved, a property must undergo a HUD-approved inspection. Eligible work includes structural changes and reconstructions, removal of safety hazards, well and septic installation, accessibility improvements, and aesthetic updates.
Renovation Loan Considerations
Millions of Americans are turning overlooked homes into dream homes with help from fixer upper loans. Keep in mind that individual lenders and government agencies all have their own rules for how to qualify for a fixer upper loan. You’ll need to work closely with your lender to make sure that you’re meeting the necessary requirements every step of the way.
- Unlike personal loans used to finance renovations, fixer upper loans generally have tighter requirements and oversight.
- You may need to get improvements completed within a specific timeframe.
- You’ll likely need to work with specially licensed contractors.
- A home in extreme distress may require you to bring in a certified consultant in to oversee the scope of work.
Don’t let the extra steps of financing a fixer upper discourage you! Finding the right option will allow you to enjoy the flexibility you need to create the home you want. Using a loan calculator to see where each option leaves you with monthly payments is one of the first steps to choosing the right home and financing.
