What is a fixer-upper?
A fixer-upper house is a home that is usually older and needs substantial repairs and renovations for it to be livable.
Buying a fixer-upper isn’t for the faint of heart. A fixer-upper can come with a host of obstacles, both financial and logistical, but the rewards can outweigh those challenges. Here are tips and considerations to make.
5 tips for buying a fixer-upper
1. Get into the right mindset
When figuring out how to buy a fixer-upper, it’s crucial that you have a plan going into it. You’ll have to devote considerable time and money to renovate a home. Budgets and timelines have been known to expand in this type of project, giving rise to the term “money pit.”
Donovan Reynolds, a licensed real estate agent with Redfin in Atlanta, suggests adding an extra 20 percent to your homebuying budget. To keep your budget in check as best as possible, know the difference between what’s necessary to do and what you want to do.
Although you might plan to do many of the repairs and renovations yourself, you may need to hire a professional for projects beyond your skillset, like electrical and plumbing work, so you’ll want to incorporate that into your budget, as well. For example, rewiring a 1,500-square-foot house costs an average of $4,000.
With many contractors backed up with projects, it’s a good idea to line up professional work as far in advance as possible. When vetting contractors, consider their reputation for arriving on time and keeping projects on schedule and within budget. You can also search around to see if they’ve been subject to litigation. When you’re ready to hire contractors, ensure the contract contains a continuous staffing and “time is of the essence” clause to help mitigate delays in the renovation.
Fannie Mae HomeStyle Loan
Fannie Mae’s HomeStyle Renovation loan is a conventional mortgage that allows borrowers to either buy a home that needs repairs or refinance their existing home loan to pay for improvements. A certified contractor must prepare and submit a cost estimate and detailed scope of work. The money for the projects goes into a separate escrow account that’s used to pay contractors directly, so you won’t have direct access to the money.
Freddie Mac’s CHOICERenovation Mortgage
This renovation loan, guaranteed by Freddie Mac, is another conventional mortgage option to roll remodeling costs into a single-close mortgage. The loan can also be used to renovate or repair a home that’s been damaged by a natural disaster or to prevent future damage from a disaster.
FHA 203(k) loan
The Federal Housing Administration Section 203(k) loan helps homebuyers purchase a home — and renovate it — with one mortgage. Homeowners can also use the FHA 203(k) loan program to refinance their existing loan and add the cost of renovation projects into the new one. FHA loans in general have lower credit score and down payment requirements than conventional mortgages.
VA renovation loan
The U.S. Department of Veterans of Affairs guarantees loans for military borrowers and their spouses. Borrowers can use a VA loan to purchase a home in need of repairs and improvements and combine the cost of those projects into their loan amount. Borrowers must use a VA-approved contractor, and lenders might charge a construction fee.
Other options to fund home renovations include taking out a home equity loan or line of credit or a personal loan. An experienced mortgage lender can help you narrow down your choices and decide on the best type of financing for your needs and real estate goals.
There is no such thing as the perfect fixer-upper — it’s a matter of a fixer-upper that’s perfect for you. Each property is different, and the choice depends on your budget, timeline and lifestyle preferences. Be realistic about whether you want to take on a major project or one that requires a few fixes here and there before taking the leap.
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