What are the best mortgage options to buy a home that needs major repairs?
You have two main mortgage options to finance the purchase of a home that requires significant renovations: a fixer upper mortgage program or a fix and flip program. We review each option below in detail so that you can select the program that is right for you.
Fixer upper programs enable you to include the cost of home repairs or renovations in a single mortgage used to purchase the property. Additionally, these programs use the post-renovation property value to calculate the loan-to-value (LTV) ratio that determines the maximum loan amount permitted. Using the post-renovation property value as opposed to the pre-renovation value enables you to qualify for a higher mortgage amount. Plus, using a single loan to finance both the home purchase and repairs can save you money and time.
The most common fixer upper mortgage programs include the HomeStyle Renovation, CHOICERenovation and FHA 203(k) programs. All of these programs require a relatively low down payment -- ranging from 3.0% to 3.5% of the property purchase price -- which makes them easier to qualify for.
Review Best Fixer Upper Mortgage Programs
These programs offer similar benefits and apply similar qualification guidelines. The most significant difference is that the FHA 203(k) Program requires you to pay an upfront and monthly mortgage insurance premium, which is non-cancellable, but FHA mortgage rates tend to be lower than conventional rates.
The HomeStyle Renovation and CHOICERenovation programs tend to charge higher mortgage rates but there is no upfront mortgage insurance fee and the monthly private mortgage insurance (PMI) fee is cancellable when your loan-to-value (LTV) ratio reaches a certain level. Please note that you are only required to pay PMI if your LTV ratio is greater than 80% at closing.
Borrowers with higher credit scores tend to choose conventional options such as the HomeStyle Renovation or CHOICERenovation program but we recommend that you compare mortgage terms to find the program that best meets your needs.
Fixer upper mortgage programs are provided by traditional lenders such as banks, mortgage brokers and credit unions. We recommend that you contact multiple lenders in the table below to learn more about program availability and qualification requirements.
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If a fixer upper mortgage program does not work for you, then you should consider a fix and flip loan, which is a short-term loan that enables you buy a property and pay for major repairs. There are multiple differences between a fix and flip loan and a fixer upper mortgage program, include the following:
a fix and flip loan is temporary and usually only outstanding until the renovations are complete
fix and flip loans charge a higher interest rate and fees
fix and flip loans may permit a higher maximum loan amount, depending on the borrower, lender and property
fix and flip loans require a higher down payment
fix and flip loans are usually structured as interest only loans as compared to fixer upper mortgage programs that amortize over the loan term
fix and flip loans may be better for larger, more complicated projects including total tear downs
Because they are a temporary and more expensive financing option, fix and flip loans are usually refinanced with a permanent mortgage when the property renovations are completed. Or if you do not intend to keep the property, the loan is repaid when the property is sold.
Fix and flip mortgages are provided by specialized or private money lenders that provide more flexible financing options than traditional lenders. If you apply for a fix and flip loan be sure to review the loan terms carefully as you may be required to pay a higher interest rate and closing costs. Plus, the loan terms may change the longer the loan is outstanding.
You can use our FREEandCLEAR Lender Directory to search for both private money lenders and lenders that offer fixer upper mortgage programs.
Sources
“What is a “higher-priced mortgage loan?” CFPB. Consumer Financial Protection Bureau, September 13 2017. Web.
"CHOICERenovation Mortgages." Single Family. Freddie Mac, June 2019. Web.
"203(K) Rehab Mortgage Insurance." Federal Housing Administration. U.S. Department of Housing and Urban Development, 2020. Web.
"HomeStyle Renovation." Mortgage Products. Fannie Mae, 2020. Web.
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