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Fixer-Upper Loans: How to Pay For That Home That Needs Some Extra Love

Fixer-upper loans allow you to buy and renovate a house with one loan, not to mention sidestep competition in a hot market.

April 6, 2022
April 6, 2022
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How does buying a house for less money and with less competition sound? If you’re looking for your home sweet home, a fixer-upper loan -- also called renovation loans -- could be your on-ramp to homeownership.

For those looking to buy a house that needs a little TLC, fixer-upper home loans allow you to purchase the home and pay for the renovations in a single mortgage.

What's in this Article?

               Can you get a loan for a fixer-upper?      




               Down payments requirements for fixer-uppers loans      




               How to get a loan to buy a fixer-upper      




               Fixer-upper pros and cons      




               Frequently asked questions      




               Key takeaways      




Can you get a loan for a fixer-upper?

You sure can. And that’s good news, because buying a fixer-upper can be a great hack in a competitive housing market.

You can use a renovation loan to purchase a home plus pay for the cost of repairs. That expands the pool of houses you might look at since the home doesn’t have to be perfect from day one. You might opt for an older or smaller house that's “good enough,” knowing you’ll be able to upgrade it and make it your ideal home.

There are several options for buying and financing renovations in a single mortgage.

Related reading: How to Find Cheap Houses: 6 Ways to Find a Home for Under $200,000

5 types of fixer-upper loans

Fannie Mae HomeStyle Renovation

Fannie Mae HomeStyle is a conventional loan for a fixer-upper. It can be used on a primary residence, or vacation and investment property remodels. Fannie Mae HomeStyle renovation loans can be used for any type of upgrades or repairs, including luxury features and additions.

Freddie Mac CHOICERenovation

Freddie Mac CHOICERenovation is another conventional loan. It can be used to finance primary home renovations or refinance a mortgage to include renovation money. Like Fannie Mae HomeStyle loans, CHOICERenovation loans may be used for luxury, cosmetic, and structural repairs and remodels.

FHA 203k loans

Backed by the Federal Housing Administration, FHA 203k is a fixer-upper loan that can only be used for primary residences. The FHA 203k Limited allows you to finance cosmetic repairs, while the FHA 203k Standard works for structural fixes and remodels. You cannot use an FHA 203k loan to make luxury upgrades to the home like pools, outdoor barbeque areas, and the like

VA renovation loans

VA renovation loans are a 0% down* loan option for eligible veterans, active-duty servicemembers, and surviving spouses with full entitlement benefit who want to buy and renovate a primary residence. As with FHA 203k Limited loans, VA renovation loans may only be used for non-structural repairs. They may not be used for luxury enhancements or on a vacation home or investment property

USDA renovation loans

USDA renovation loans are another 0% down option to finance a fixer-upper in rural areas and qualifying suburbs. Like FHA 203k loans, there is a USDA Limited and USDA Standard renovation loan option. The USDA Limited can be used toward cosmetic, non-structural repairs. Neither option allows for luxury enhancements. The USDA Standard may be used for structural fixes and renovations. You can only use a USDA renovation loan to purchase and renovate a primary residence.

Down payments requirements for fixer-uppers loans

Fortunately, if you are buying the house as a primary residence, all of these loan types have low down payment options:

  • Conventional renovation loan: 3% down for first-time homebuyers; 5% down for repeat homebuyers
  • FHA 203k Limited or Standard renovation loan: 3.5% down with minimum 580 credit score; some lenders may have higher minimums
  • VA renovation loan: 0% down
  • USDA renovation loan: 0% down

How to get a loan to buy a fixer-upper

The process for buying a fixer-upper with a renovation loan is similar to buying a move-in ready home. But there are some particular guidelines and steps to note.

Pay close attention to your preapproval amount

You’ll want to start with a preapproval. That’s true for any house, but it’s particularly helpful if you’re considering a fixer-upper. Your preapproval amount will tell you how much you can borrow in total – meaning how much you can spend on the purchase and renovations combined.

Here’s how that might work. Let’s say you get preapproved for $250,000. You find a home for $225,000. If you choose to buy that home, $225,000 will go toward the home purchase and you’ll have $25,000 left for the renovations, fees, and contingency fund.

You will need a formal bid from a contractor to close on the home

After you go under contract on a home, your lender will need a formal bid from a contractor detailing the work that is planned and the costs associated with the remodel or repairs.

This is a key step in the renovation loan process, as your lender needs to verify the work that will be done. They’ll also need to see an appraisal report to ensure that the renovations you’ve planned will enhance the home’s value and that it will be worth the amount you’re borrowing after the work is finished.

Related reading: Is a Fixer-Upper Worth It? 5 Things You Should Know Before Renovating a Home

There may be limits to how much you can spend on renovations

It’s important to note that there may be a spending cap on your renovation funds, depending which loan program you use.

Conventional renovation loans

With both the Fannie Mae HomeStyle and Freddie Mac CHOICERenovation loans, you can borrow up to your preapproved amount. That means there is no limit to your renovation costs, within the preapproved range. However, renovation cost may not exceed 75% of the “as completed” appraised value of the property.

Example: If you were preapproved for $300,000 and you purchased a home for $200,000, you could use the remaining $100,000 for any renovations of your choosing.

FHA 203k Limited and Standard

The FHA 203k Limited allows you to finance $35,000 in renovations. You don’t get the full $35,000 for repairs. Your lender will have to set aside a contingency fund between 10% and 20% of the repair costs in case the labor or material costs go over budget, along with funds for any necessary permits or zoning fees.

The FHA 203k Standard, on the other hand, allows you to finance up to the maximum FHA mortgage amount.

USDA Limited and Standard

The same applies to the USDA renovation loans. The USDA Limited allows you to finance up to $35,000 in renovations, minus contingency fund and fees. The USDA Standard allows you to finance up to your preapproved amount.

VA renovation loans

VA renovation loans almost limit your renovation funds to $35,000. And your lender can only approve your renovation funds for as much value as the upgrades will add to the home.

For instance, if your planned repairs will only add $20,000 to the home’s value, you will only be able to borrow $20,000 toward renovations. They can’t approve you for the full $35,000 unless it’s justified by the projected increase in the property value.

Work on the home doesn’t start until after closing

Once you close on the mortgage, the loan enters the “draw period.” This is when your lender will start disbursing payments to your contractor, who can then begin the work.

Conventional, FHA, and USDA all have a six-month construction period beginning when the loan closes. For a VA loan, renovations must be complete within 90 days.

Fixer-upper loans pros and cons

With your mindset aligned and realistic expectations set, buying a fixer-upper can be a truly meaningful homeownership experience. But it’s not for everyone, and it’s important to go into a renovation project with your eyes wide open.

Here are some pros and cons to buying a fixer-upper:

ProsConsYou may be able to buy more house for less with a renovation loanNot all renovation loans allow for structural or luxury enhancementsRenovation loans allow you to turn a so-so property into your dream homeThe loan process may take longer than with a standard purchase loan since you need to secure bids from licensed contractorsThere are low down payment renovation loan options if you’re buying a primary residenceYou may get less bang for your buck in the current economic climate, as supply chain shortages have driven up the cost of materialsOne loan and one monthly payment for the purchase of the home and the repairsYou may need a contingency fund, which leaves less cash available for renovations

Related reading: Buying an Old House Has Its Challenges. Here’s How to Decide If It’s Right for You

Fixer-upper loans FAQs

What kind of loans do they use on a fixer-upper? There are several renovation loan options for buying a fixer-upper, including:

-Fannie Mae HomeStyle renovation loans
-Freddie Mac CHOICERenovation loans
-FHA 203k Limited and Standard renovation loans
-VA renovation loans
-USDA Limited and Standard renovation loans

Each has its own guidelines so check with a lender on which one is best for you.

Can you get a conventional loan on a fixer-upper? Yes, you can get a Fannie Mae HomeStyle renovation loan or Freddie Mac CHOICERenovation loan. Both offer a 3% down payment option, as long as the home will be your primary residence and you are a first-time homebuyer (defined as never having owned a home or not having owned a home in the past three years).

If you are a repeat homebuyer, you may qualify for a conventional renovation loan with 5% down.

You can also use a standard conventional loan to purchase the home and pay for the renovations separately, out of your savings or through another type of financing.

How do you get money to renovate a house? You can use a low down payment renovation loan to purchase and renovate a primary residence. Alternatively, you might consider:

-Home Equity Line of Credit (HELOC)
-Home equity loan
-Cash-out refinance
-Personal loans
-A reverse mortgage if you’re over 62
-Non-profit grants or historic preservation loans, if you – and the property – qualify

Which loan is best for a house that needs improvements? If you want to buy a house that needs improvements, you might consider a renovation loan, which allows you to purchase the home and finance the repairs into a single mortgage. There are several types of low down payment renovation loans:

-Conventional renovation loan: 3% down for first-time buyers; minimum 5% down required for repeat buyers
-FHA 203k Limited or Standard renovation loan: 3.5% down with a minimum 580 credit score; some lenders may have higher minimum credit score requirements
-VA renovation loan: 0% down
-USDA renovation loan: 0% down

The bottom line

Buying a fixer-upper can be a great way to hack the current market and turn an OK house into an amazing one. Fixer-upper loans help simplify that process by allowing you to buy the house and renovate it with a single one.

  • Renovation loans allow you to buy a home and pay for repairs and upgrades with a single mortgage
  • How much you can borrow for renovations depends on the type of loan you use
  • Conventional renovation loans allow for cosmetic, structural, and luxury enhancements to the home
  • FHA, USDA, and VA renovation loans cannot be used to make luxury upgrades

*A down payment is required if the borrower does not have full VA entitlement or when the loan amount exceeds the VA county limits. VA loans subject to individual VA Entitlement amounts and eligibility, qualifying factors such as income and credit guidelines, and property limits. Pre-approval is based on a preliminary review of credit information provided to Fairway Independent Mortgage Corporation, which has not been reviewed by underwriting. If you have submitted verifying documentation, you have done so voluntarily. Final loan approval is subject to a full underwriting review of support documentation including, but not limited to, applicants’ creditworthiness, assets, income information, and a satisfactory appraisal.

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