How to finance a fixer-upper

CouplekitchenIf you’re buying a home that needs a little TLC, a typical fixed-rate mortgage isn’t going to help you pay for repairs.

Your lender, for instance, isn’t going to approve a $300,000 loan to buy a home that’s only worth $250,000. And, while homeowners sometimes use home equity loans to remodel, you can’t get a home equity loan when you have no equity.

This can be a big obstacle for buyers who don’t have extra cash to make needed renovations or repairs before moving in.

But there are two loan programs that can make your dream of rehabbing a fixer-upper a reality: the Federal Housing Administration’s 203(k) mortgage and Fannie Mae’s HomeStyle Renovation mortgage.

The programs achieve the same goal — providing homeowners with a mortgage and access to money to make necessary improvements — but come with different requirements and best serve different types of buyers.

FHA 203(k) mortgage

This type of financing is ideal for borrowers who either have little money for a down payment or who have an average or slightly below average credit score, says Bruce Ailion, a broker with RE/MAX Town and Country serving greater Atlanta.

There are three types of 203(k) loans.

The regular 203(k) loan is for almost any kind of repair or improvement — even the reconstruction of a demolished home, as long as the original foundation remains.

You can borrow more than the home is worth, as long as the repairs will increase its appraised value.

The most you can borrow is 110% of what an appraiser estimates it will be worth after renovations, or the cost of the home plus the estimated renovation cost, whichever is less. At least $5,000 of what you borrow has to go toward renovations.

The maximum also must fall below the FHA mortgage limit for the area — $271,050 for single-family homes in most parts of the country and up to $625,500 in high-cost areas.

The Streamlined 203(k) mortgage is for projects that don’t require plans, consultants, engineers or architects — in other words, no structural modifications such as adding rooms.

You can use one of these loans to repair or replace:

Roofs, gutters and downspouts.

Decks, patios and porches.

Heating and cooling systems.

Windows, doors and exterior siding.

Plumbing and electrical systems.


It can also be used to remodel your kitchen and get new appliances, to finish your basement, to paint your home and to add insulation and weather-stripping.

You can borrow the purchase price plus up to $35,000 for repairs, improvements and upgrades. There is no minimum repair amount.

The PowerSaver Pilot 203(k) mortgage is for adding energy-saving home upgrades.

You can do everything with a PowerSaver Pilot loan that you can with the other two 203(k) loans.

The main benefit of choosing this option is that the Department of Housing and Urban Development, which oversees the 203(k) program, offers grants to reduce closing costs.

Like the Streamline loan, you can borrow up to $35,000 for repairs, improvements and upgrades, plus the home’s purchase price, with the PowerSaver Pilot loan.

Unlike the Streamline loan, which has no minimum repair amount, you must use the PowerSaver Pilot loan to complete at least $3,500 in energy upgrades.

The remaining upgrades under the $35,000 cap can be cosmetic or structural and do not have to be energy-related.

There are only five approved lenders for PowerSaver Pilot loan nationwide, and the program is currently set to expire on May 4, 2015.

You’ll have the broadest choice of lenders if you live in Arizona or California. There are no approved lenders in Georgia or Massachusetts.

All the usual FHA requirements apply to these loans.

You can search for an FHA 203(k) lender by going to Housing and Urban Development’s online search tool and checking the 203(k) box at the bottom of the page.

The Office of the Comptroller of the Currency says the 203(k) loan market has more than 275 participating lenders, including large and small national banks and independent mortgage companies.

Our test searches came up with few results even in major metropolitan areas like Los Angeles (four lenders), New York (two lenders), Chicago (five lenders) and Houston (eight lenders), so you may have trouble finding a participating lender.

The main problem with the 203(k) loan, however, is the cost of the mortgage insurance, says Joe Parsons, senior loan officer with PFS Funding in Dublin, California, and author of The Mortgage Insider blog.

You’ll pay up-front mortgage insurance of 1.75% of the loan amount and 0.85% annually on the principal balance for the life of the loan.

“The insurance cannot be removed, even when there is more equity in the property,” Parsons says.

You can drop private mortgage insurance on a conventional loan when equity in the home reaches 20%.

Fannie Mae HomeStyle Renovation mortgage

This type of financing requires a down payment of just 5% if you’re buying a single-family home with a fixed-rate mortgage.

You’ll have 12 months to complete all of the work, and there’s no minimum amount you must devote to repairs.

The most you can borrow on the home is the lesser of:

An appraiser’s estimate of the market value after improvements.

The purchase price plus renovation costs, or “cost basis” value of the home.

With a HomeStyle loan, the total cost of the work can be as much as 50% of what the property is expected to appraise for once the work is complete, but the mortgage amount still must fall within the above guidelines.

Suppose you want to purchase a home that costs $190,000.

The appraiser looks at your plans, scope of work and comps, and determines the property’s after-renovation value to be $250,000.

Fannie Mae says you can borrow up to 50% of that, or $125,000, for repairs.

The purchase price of $190,000 plus $125,000 for repairs equals $315,000. Subtract your 5% down payment, and you can theoretically borrow $299,250.

However, in this case, the cost basis of $315,000 is higher than the after-renovation value of $250,000, and you can only borrow based on the lower of the two.

So with 5% down, the most you could borrow would be $237,500. Subtracting the $190,000 purchase price, you’d need to limit your repair costs to $47,500.

HomeStyle loans are also subject to the usual conventional mortgage limits, which are $417,000 for one-unit, single-family homes in most areas, up to $625,500 in certain high-cost areas and $938,250 in Alaska, Guam, Hawaii and the U.S. Virgin Islands.

With less than 20% down, you’ll also have to pay private mortgage insurance or PMI, which is based on the as-completed value, not the purchase price.

One final advantage is that HomeStyle loans are available to investors with a 15% down payment. Investors cannot take out 203(k) mortgages.

Fannie Mae does not offer a publicly available search tool to find a HomeStyle renovation lender, so you’ll have to do a Google search, contact lenders in your area or get a referral from a local real estate agent.

Common features of home renovation loans

Before the appraisal, you’ll need to draw up a budget based on contractors’ estimates for your proposed scope of work.

The appraiser will use this information to estimate an after-improved value for the home you want to buy, which determines how much you can borrow.

You’ll be able to choose your own contractor, but the lender will have to approve them, so pick someone who is qualified, licensed and bonded.

HomeStyle and 203(k) loans allow for the possibility of some DIY work.

Loan fees, such as the origination fee and the appraisal fee, may be higher since renovation loans are more complex than a typical mortgage. For the same reason, closing may take 60 to 90 days instead of the typical 30 to 45 days.

Interest rates for renovation loans are usually one-eighth to one-quarter of a percentage point higher than they are for a conventional mortgage because these loans are riskier for the lender.

Both loans let you finance up to six months’ worth of mortgage payments if you can’t occupy the home during renovations. Source: by Amy Fontinelle

Your Loan in the Valley


Posted on April 23, 2015, in QUICK TIPS, CUSTOMERS and tagged , , , , , , , . Bookmark the permalink. Leave a comment.

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