I’m not a do-it-yourselfer. When I bought my house in 2007, not only did I buy new, but I also negotiated with the builder to have it finish the lower level.
However, not everyone is like me. Some homebuyers like the challenge and the potential cost savings that can come with purchasing a fixer-upper.
If you’re in that group and want to buy a home that could use some love, you’ll have to decide whether to add renovation costs to the mortgage or take out a separate loan. Here are some financing options you should consider.
1. FHA 203(k) mortgage
“What I suggest to most of my clients buying fixer-uppers is to use the FHA 203(k) mortgage,” said Aaron Bowman, an agent with Mazz Real Estate. “This loan allows you to purchase a property with money set aside for renovations.”
Getting an FHA 203(k) mortgage comes with the same requirements as your typical FHA loan. So in order to qualify, you need:
- To use the home as your primary residence
- A credit score of at least 500
- A down payment of at least 3.5%
- The ability to pay the FHA mortgage insurance premium
In addition to meeting general FHA loan requirements, your renovations must cost at least $5,000. However, the total cost of the home must not be more than the FHA mortgage limits for your area. If you decide to choose an FHA 203(k) mortgage to roll the costs of renovating your fixer-upper into your home loan, you’ll be assigned a 203(k) consultant who’ll help determine how much you can borrow.
Because the FHA 203(k) comes with a lower down payment, it can be a benefit to you as you seek to renovate your home. But if you don’t qualify, or if you don’t want to use this type of mortgage for your fixer-upper, you can look into other options.
2. A conventional mortgage
“A buyer could purchase a fixer-upper and roll the renovation money into the loan for a low relative cost,” Jarvis said. “I estimate that a $50,000 renovation would only add about $250 or so to the monthly payment.”
That’s an affordable way to upgrade the home — if you can get a lender to agree.
Jarvis pointed out that these loans are hard to get since you have to convince an appraiser that the renovations will be worth it in the end. Plus, the lender might have strict income and credit requirements.
The FHA 203(k) is likely to be easier to get in many cases, as long as you work with a lender that offers these loans.
3. Personal loan to pay for renovations
Rather than rolling the costs associated with your fixer-upper into the original mortgage, it’s possible to get a separate loan to pay for renovations.
Michael Hausam, an agent with The Hausam Group, however, warned that doing so could cost you more money in the long run. “Most secondary financing is at a higher interest rate,” he said. “Besides, other costs with getting another loan ends up just being wasted money.”
It’s possible to turn to personal loans to pay for upgrades. A separate personal loan can come with a competitive interest rate. As Hausam pointed out, though, your interest rate is probably going to be higher than what you’d pay on your mortgage.
The advantage to using a personal loan is that you don’t have to worry about securing the debt with your home. On top of that, if you don’t qualify for a fixer-upper mortgage, you might be able to get a personal loan — even if it costs more.
How to decide whether to add renovation costs to your mortgage or take out a separate loan
In the end, our experts agreed that most homebuyers benefit when they can roll the cost of renovations into a mortgage instead of getting a separate loan.
However, if you don’t qualify for a fixer-upper mortgage, you might have to get a personal loan — or wait until you’ve been in the home long enough to get a home equity line of credit.
“Compare the costs and consider your finances,” said Bowman. “Using the 203(k) if you can is a good way to get into a home and fix it up with little money down.”
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||Rates (APR)||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
|7.73% – 29.99%||$1,000 - $50,000|
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|4.99% – 29.99%||$10,000 - $35,000||Visit FreedomPlus|
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|15.49% – 34.49%||$2,000 - $25,000||Visit LendingPoint|
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|5.49% – 18.24%||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%||$2,000 - $35,000||Visit Avant|