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 2019!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.95% to 35.89%*. The origination fee ranges from 1% to 6% of the original principal balance and is deducted from your loan proceeds. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at the time of application. The average origination fee is 5.49% as of Q1 2017. In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,025 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months. Borrower must be a U.S. citizen, permanent resident or be in the United States on a valid long term visa and at least 18 years old. Valid bank account and Social Security number are required. Equal Housing Lender. All loans are subject to credit approval. LendingClub’s physical address is: LendingClub, 71 Stevenson Street, Suite 1000, San Francisco, CA 94105.
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7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
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** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|5.74% – 16.99%1||$5,000 - $100,000|
|7.54% – 35.99%||$1,000 - $50,000|
|7.99% – 35.89%*||$1,000 - $50,000|
|5.99% – 24.99%2||$5,000 - $35,000|
|5.99% – 29.99%3||$7,500 - $40,000|
|6.79% – 20.89%4||$5,000 - $50,000|
|9.99% – 35.99%5||$2,000 - $25,000|
|6.95% – 35.89%6||$1,000 - $40,000|
|6.99% – 18.24%7||$5,000 - $75,000|
|9.95% – 35.99%8||$2,000 - $35,000|