Purchasing a Home That’s a Fixer-Upper

Problem with Conventional Funding

Banks don’t want to lend money unless they know their investment is protected. For mortgage lenders, that means making sure that their loan amounts are less than the value of the properties they’re tied to. Fixer-uppers don’t meet that requirement. So in these cases, buyers often need to find short-term funding to purchase the house, make the repairs, then seek out a long-term mortgage on the finished home. That can be difficult and expensive.

Solution

You can do it all with one loan, through HUD’s Section 203(k) program. It combines the purchase price and the cost of the improvements in one long-term mortgage. The lender bases the loan amount on the value of the property after the repairs and upgrades are made.

Down Payment Needed When Purchasing a Fixer-Upper

You typically need to put down about 3.5% of the purchase plus the price of repairs.

Process

Here are the typical steps for obtaining a 203(k) loan:

• Find a fixer-upper property. Work with a real estate agent to write a purchase contract that states your intent to seek this kind of purchase-and-improve loan financing. The contract should state that the buyer is seeking a 203(k) loan and that the contract is contingent on loan approval based on additional required repairs by the FHA or the lender.
• Pick an FHA-approved 203(k) lender.
• Prepare a detailed proposal showing the scope of renovations. Include cost estimates.
• The lender orders an appraisal. This determines what the value of the property may be after the renovation work is done.
• Assuming your credit meets the lender’s criteria, they will issue a loan for the amount to cover the purchase, the remodeling and the closing costs. The loans typically include a “buffer” of 10-to-20 percent of the cost of repairs, just in case things turn out to be more expensive than expected.
• At closing, the closing agent pays the seller and keeps the rest of the loan amount in an escrow account to pay for the repairs and improvements during the rehabilitation period.
• After closing, you begin paying on the loan. And the contractor begins working on your project. If you can’t occupy the property during the renovation process, make sure you understand how that will impact you and your loan. There are time and cost caps for projects that require you to stay out of the property during construction.
• Throughout the construction process, the contractor will request payments from the escrow agent. They will only be paid in full when the work is all done.