If you have your heart set on a particular neighborhood where most houses are beyond your budget, or if you’re looking for a house to buy as an investment, a fixer upper may be your best choice. After you make a down payment and pay closing costs, you may not have enough cash left over to pay for renovations. Fortunately, there are other ways to cover those costs.
Ways to Pay for Minor Repairs
If you buy a house that doesn’t need much work, you can take out a conventional mortgage and pay for upgrades with savings, a credit card or a personal loan. Be careful if you use a credit card. A high interest rate can add a significant amount to the total cost.
Also, using one of these options will limit your budget. You may have to stick to small renovations or tackle projects one at a time to avoid spending too much.
How to Cover Major Repairs
If you want to buy a house that needs a significant amount of work, you may have to take out a renovation loan. That type of mortgage can cover the cost of both a home purchase and repairs. You may be required to get your renovation plans approved, have the work inspected and get multiple appraisals to protect the lender’s investment in the property.
One option is an FHA 203(k) renovation loan offered by the Federal Housing Administration. This may be a good choice if you have a low income and/or credit score. A Housing and Urban Development consultant will have to approve your plans, manage payments to contractors and conduct a series of inspections.
Fannie Mae offers a HomeStyle renovation loan. This is similar to an FHA 203(k) loan, but a HomeStyle mortgage requires a higher credit score. A HomeStyle loan can be used to finance virtually any type of home improvement, including “luxury” upgrades, such as a pool.
If you’re a veteran or an active-duty service member, you may be able to pay for the cost of a house and repairs with a VA renovation loan. You will have to work with a VA-approved contractor, and the types of projects that are eligible for financing may be limited. You won’t have to make a down payment, though, and you can also benefit from lower closing costs than you would pay for another type of mortgage.
A CHOICERenovation loan is guaranteed by Freddie Mac. It can be used to pay for upgrades to make a house resistant to natural disasters, as well as other types of improvements.
Buying a Fixer Upper Can Be Affordable
Renovating a house can help you earn a profit or build equity quickly. Repairs can be expensive, but several financing options are available. If you’re thinking about buying a fixer upper, figure out if one of these mortgages is right for you.
