Getting a mortgage for a fixer upper can be challenging for several reasons. First, most standard loan programs do not use the after renovation property value to determine what size mortgage you qualify for. This significantly limits your mortgage amount, especially if you are making major repairs or renovations that add a lot of value the property. In short, lenders prefer to lend against the current, or pre-renovation, value of the property because of the additional risk associated with with a fixer upper.
From the lender's standpoint, there is no guarantee that the renovations you intend to make will be completed or increase the value of the property. If something happens over the course of the renovation project, such as permits getting cancelled or cost overruns, you may decide to put the work on hold. Or the renovations you make may not add as much value as you thought, especially if mistakes are made along the way. If the work is not completed or done poorly, the property value remains the same or potentially declines, which gives the lender less protection for their loan. In short, fixer upper mortgages mean more risk for lenders which makes them harder to find.
Despite these challenges, however, there are multiple fixer upper mortgage programs available to borrowers. There are several items you should focus on to determine the lender and program that are right for you.
First, make sure that the mortgage program uses the after renovation property value to determine what size loan you qualify for. Using the after renovation property value enables you to afford a much larger mortgage which means you have more money to put into the home for renovations.
For example, let‚Äôs say you want to buy a home with a pre-renovation value of $350,000 and an after renovation value of $500,000. If the lender applies a loan-to-value (LTV) ratio of 80% and uses the after renovation property value, you may be able to obtain a $400,000 mortgage ($500,000 (property value) * 80% (LTV ratio) = $400,000 (loan amount)), assuming you can afford the monthly payment. But if the lender uses the pre-renovation property value, you can only qualify for a $280,000 mortgage ($350,000 (property value) * 80% (LTV ratio) = $280,000 (loan amount)). So using the after renovation property value is very important when you apply for a fixer upper mortgage.
The second point you should focus on is that you want one loan to pay for both the property purchase (or refinance) and the cost of renovations or remodeling. Some construction loan programs are broken into two separate mortgages. The first mortgage finances the property purchase and construction and is temporary and short term. The second mortgage is put in place when the construction is completed and is long term. A lot can change in between when the two loans are put in place, including an increase in mortgage rates.
Ideally, a fixer upper mortgage should be a single loan that does not need to be replaced with a permanent loan later in the process. This means that your loan terms are not subject to change so you know what your mortgage rate and monthly payment are going to be when the renovation project is complete. Most fixer upper mortgage programs have a single closing with part of the proceeds going to purchase the property and the remaining proceeds are deposited into an escrow account to pay for renovation costs as they are incurred. After the renovations are finished, the escrow account is closed, your mortgage is already in place and you move into your home.
Use the FREEandCLEAR Lender Directory to find leading lenders that offer a wide range of fixer upper mortgage programs.
Another item you should keep in mind is to understand the key loan terms for the fixer upper mortgage program. For example, some programs limit the amount of renovations you can make relative to the value of the property which may be an issue for serious fixer uppers that require substantial rehabilitation. Other programs may have loan limits that cap what size mortgage you can obtain. You should always check to see if your fixer upper fits within the program‚Äôs project and loan limit.
Additionally, make sure you understand how the application process works including the documents, engineering and architectural reports and renovation plans you are required to submit. Lenders want to make sure that you are ready to start the work as soon as your mortgage closes. Time is money for both borrowers and lenders so being prepared and organized is key.
Below we summarize some of the best fixer upper mortgage programs available to borrowers. Each program has its pros and cons but can be very useful to someone who needs to finance significant property repairs, remodeling or renovations. The construction to permanent (C2P), FHA 203(k) and HomeStyle Renovation programs enable you to finance the purchase of the property plus renovation costs without taking out a separate construction loan, which can be expensive and time consuming.
Because these programs apply to home purchases and refinancies they are beneficial to both prospective home buyers and existing homeowners who would like to finance a fixer upper. Click on the program titles to find more detailed information including program eligibility, loan terms and borrower qualification requirements.
Please note that the fixer upper mortgage programs below assume that you live in the property when the renovations are complete. If you are looking to renovate the property and then sell, or flip, it instead, you need a fix & flip loan, which is usually provided by a hard money lender, which is also knows as a private money lender. Fix & flip loans are short-term and usually much more expensive than the fixer upper mortgages outlined below.
"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.
"CHOICERenovation Mortgages." Single Family. Freddie Mac, June 2019. Web.