Once you have found your perfect fixer-upper you will start thinking about how to finance the renovations necessary. Unfortunately standard mortgages are not a good tool to finance a fixer-upper. Most lenders will only offer mortgages that cover the current appraised value of the home without including any money for renovation. However, there is a solution to this problem as there are special mortgages available that will allow you to cover renovation cost in your mortgage:
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Standard FHA 205(k) Mortgage
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Limited FHA 205(k) Mortgage
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FannieMae HomeStyle Renovation Mortgage
Renovation Loans Explained
|
Standard FHA 205(k) Mortgage |
Limited FHA 205(k) Mortgage |
Fannie Mae HomeStyle Renovation Mortgage |
|
| Minimum Downpayment |
3.5 % |
3.5 % |
5% |
| Minimum Credit Score |
500-580 depending on downpayment |
500-580 depending on downpayment |
680-700 depnding on down payment and other factors |
| Max Amount you can Borrow |
110% of appraised value of home after renovation but max $271,050 for single-family homes in most parts of the country and up to $625,500 in high cost areas |
110% of appraised value of home after renovation but max $271,050 for single-family homes in most parts of the country and up to $625,500 in high cost areas |
95% of appraised home value after renovation |
|
Amount of loan that can be used for renovation |
No Limit |
No Limit |
$30,000 |
|
Extra Requirements |
- You need to hire 203(k) Consultant (costs a few hundred dollars) - Renovation must be at least $5000 |
Mortgage Insurance and 0.85 extra on the loan |
- Lender will oversee renovation |
| Renovation Restriction |
No restrictions other than original foundadtion must be maintained |
No Structural Changes allowed |
No Restrictions |
Other Things to Consider
Interest rates for renovation loans are usually one-eighth to one-quarter of a percentage point higher than they are for a conventional mortgage and these loans allow you to pospone up to six monthly payments until you can occupy the home after renovations are done. The interest for those months will added to the principal of the loan. Loan fees for these loans can be higher and closing may take 60 to 90 days instead of the typical 30 to 45 days.
For all these types of mortgages you will need a solid contractor’s estimated for the renovations you are planning. The appraiser will use this information to estimate the value of your house after the improvements are done. These loans allow you to include your own labor, but you can’t pay yourself from the money you borrow.
