Many borrowers who plan on buying a fixer-upper discover that it can be challenging to find financing, as lenders typically do not want to make a mortgage on a property that is uninhabitable.
One popular way to buy a fixer-upper is an FHA 203(k) loan, which allows you to borrow money for home improvement and home purchase in the same loan. These loans, often used to revitalize neighborhoods, are offered through the Federal Housing Administration (FHA) to encourage lenders to provide money for purchases that may seem risky.
There are two types of FHA 203(k) loans: the regular loan and the streamlined option. If you choose the regular loan, the maximum loan amount is the lesser of the as-is value of the home, along with repairs, or 110 percent of the home's estimated value after repairs. An FHA Streamlined 203(k) loan allows you to receive a loan for the purchase, as well as $35,000 for repairs.
You can get an FHA 203(k) loan with a fixed or adjustable rate, and a 15-year or 30-year term. While rates will be a bit higher than standard FHA loans, this loan option is often the best way to buy a fixer-upper.
To qualify for an FHA 203(k) loan, you must plan to live in the home as your primary residence. The home can have necessary structural repairs for a regular loan, or just non-structural repairs for the Streamlined 203(k) loan. The following properties can qualify:
The FHA has rules about which types of repairs can be covered by a 203(k) loan, and the lender may also allow or disallow certain repairs. Allowable repairs under an FHA 203(k) mortgage include:
You can include the cost of labor in your loan, even if you plan to do the work yourself. Be aware that repair work must be finished within six months of getting the loan!
The greatest benefit of a 203(k) mortgage is you can buy a home that needs repairs that you could otherwise not afford. FHA 203(k) home loans usually have low down payment requirements, as well as competitive interest rates.