If you watch house flipping TV shows, you might have considered buying and working on a fixer-upper. They’re more affordable than “move-in ready” homes, and there’s room to design them according to your desires. They’re also great for first-time buyers because house prices are finally going down. The universal message of house flipping shows is that the homeowners have better control over the renovation work and can attain the look they want.
The same goes with the financing behind it. Homeowners have better control over renovation expenses. Academy Mortgage Arizona says that getting a renovation loan is a great way to manage costs by having one payment each month for both mortgage and renovation.
There are many renovation loans available to aspiring home flippers, but the best for fixer-uppers, in terms of the amount of loan, are the government-insured FHA 203(k) loan, also known as the FHA Construction Loan, and the government-sponsored Fannie Mae Homestyle® Renovation loan. Both mortgage products base the loan amount on your home’s complete value after renovation. These loans differ from Home Equity Loans and Home Equity Line of Credit (HELOC), which lend according to the current value of your property.
Here are details about the two mortgage loans.
FHA 203(k) Loan
This loan covers the purchase and renovation of a home for people with credit scores of at least 580. You also need to qualify for standard FHA loan requirements and pay a minimum down payment of 3.5%. This loan has two types.
The first is the Limited 203(k) mortgage (also known as 203k Streamline), which has these features and scope of work:
- It can finance work that costs up to $35,000.
- There is no minimum loan balance required.
- Due to its low cost, this mortgage is best for minor projects such as bathroom and kitchen remodels.
- You must complete work within six months.
The second is the Standard 203(k) mortgage, which has the following features and scope of work:
- It can finance almost any kind of renovation as you can borrow up to 110% of the estimated completed value of your house.
- There is a minimum loan balance of $5,000
- Since it allows you to create major alterations, the FHA requires you to hire a 203(k) consultant to look at the work you plan to do. This is to make sure that work will be completed within 12 months.
- The mortgage is great if you’re going to make structural alterations to your home.
- You can reconstruct a demolished home using this loan as long as the original foundation is still there.
Apart from the requirements above, you need to pay the standard FHA mortgage insurance of 1.75% of your full loan upfront and 0.85% per year. This loan discourages DIY work as it requires you to hire licensed contractors to do the renovation.
Fannie Mae HomeStyle® Renovation Loan
This loan allows you to borrow for the purchase and remodeling work of your property, up to 75% of the total value after renovation.
- The loan amount may cover the architect, contractor, and inspection costs, the contingency reserve of 10% for extra expenses during construction, and the minimum down payment of 5%.
- This mortgage allows you to make any kind of renovation to your home.
- This is also great if you want to DIY. HomeStyle® Renovation allows borrowers to help with the refurbishment at the lender’s discretion.
- The work must not exceed 10% of the value of the completed property.
The type of renovation loan that’s right for your fixer-upper relies on the amount of work that needs to be done. If you find one that requires only minor upgrades, such as adding a room or a bathroom, the Limited 203(k) mortgage is your best choice. This is because you require a low budget for flipping the house and your loan may get approved faster.
For bigger projects such as structural alterations and reconstruction, consider getting the Standard 203(k) or the Fannie Mae HomeStyle® Renovation. They provide higher loan amounts than what you’d get from a Limited 203(k).
Once you’ve decided on the type of loan, take your time to plan and prepare for the renovation proper. Work with your contractor and consultants to achieve your dream design. The best thing about a fixer-upper is that you can truly make it your own.