I want to buy a fixer-upper. What is the best mortgage option to cover both the purchase price and renovations?
Before you decide to buy a fixer-upper or commit to a specific financing option, it's important to understand the pros and cons.
Some of the advantages include lower list prices (and thus lower down payment requirements), less competition that can push prices upward, and greater flexibility to customize a home to your exact taste and quality preferences.
On the flip side, the cost of renovations may cancel out the lower list price. It's also difficult to accurately project the final cost of renovations.
There are several specialized financing options available that roll the purchase price and renovations into one payment (and only one set of closing costs).
An FHA 203(k) loa n, also known as a rehab loan, is geared toward budget-conscious and first-time home buyers, and requires borrowers to submit renovation plans (including contractor bids and timelines) to the lender for review. The loan is calculated based on current appraised value and the projected value after renovations, and must fall within applicable FHA loan limits. The home also must already meet certain standards for safety and livability to qualify.
Veterans may also be eligible for VA rehab and renovation loans, which function much like FHA 203(k) loans. However, only a few lenders offer these loans and finding the right one might be a challenge for borrowers.
The Freddie Mac CHOICERenovation loan can be used to purchase a new home or fund renovations on an existing home, and is available through numerous lenders. It might be a good option for properties that require significant work, and unlike FHA 203(k) or VA loans, can be used for structural changes like new additions. And because this loan is guaranteed through Freddie Mac, it may offer lower rates for borrowers and provide significant savings over the life of the loan.