A How-to Guide to Financing a Fixer Upper: Rehab, Renovation and Construction Mortgages

options for interior updates on fixer upper

Americans are expected to spend more than $300 billion this year on remodeling projects. Financing your renovations means that you won’t have to come up with cash for every expense involved in transforming your home. Whether you’re a first-time homebuyer falling in love with a fixer-upper or looking to renovate your current home to bring it up to snuff, there are many renovation home loan options out there. Let’s look at a few ways you can finance your fixer-upper.

Start with a home inspection

Before anything else can happen, you’ll want to know what your to-do list is going to look like. Choose a reliable inspector to check every aspect of the house from top to bottom: will you need a new roof or plumbing? Are some of the windows in good shape or will you need to plan for a total replacement? Is anything in that dated kitchen or bath salvageable? Make a thorough list so you can create your remodeling wish list.

Get detailed repair and remodel estimates

Once you know the scope of the project, it’s time to talk to friends, family, and coworkers to get recommendations for licensed contractors in your area. Some renovation loans require you to use specific contractors, so if you are working with the bank to make your dream home happen, be sure you get their list of approved partners.

How do you pay for a renovation project?

If you can see your home’s potential, but not how to pay for it, there are several options including renovation loans and home equity loans of lines of credit. Smaller remodeling projects can be financed with savings and credit cards, but most renovations will require a little more backing.

Fannie Mae HomeStyle Renovation Loans

These are flexible home loans offering homeowners access to cash to make home repairs and renovations through a first mortgage rather than a second mortgage. HomeStyle Renovation loans are available for owner-occupied homeowners as well as investors. These involve refinancing with a mortgage based on the house’s estimated value after renovations are completed. Down payments can be as low as 3% for HomeStyle Renovation loans and can be used for updates to an older home, significant design improvements, or even to build in-law suites or basement apartments.

FHA 203k Loan

Sometimes called a Rehab Loan or FHA Construction Loan, a 203k loan allows you to refinance the house and needed repairs. The federal government backs these loans and lenders track and verify repairs at key points in the process. To qualify for a 203k loan, you’ll need to meet the same asset, credit and debt-to-income ratio requirements as any other FHA loan. Because the loan is based on the value of a home after improvements, rather than before, your equity and the amount you can borrow are both greater. And you can hire a contractor or do the work yourself.

Home Equity Lines of Credit

A home equity line of credit, or HELOC, is typically available only if you have at least 20% equity in your home. These work like credit cards: you are given a revolving line of credit to access funds when you need them – a plus if your project will take many months. There are no closing costs and no interest is due until you tap the line of credit. Interest rates are adjustable, with most tied to the prime rate. Typically, you can draw from a HELOC for up to 10 years (the draw period). During this time, you may pay interest on the borrowed funds. After ten years, the loan enters repayment, so you’ll have a couple of options on how to pay it back: a balloon payment to pay back the entire loan at once or installment payments.

Home Equity Loans

A home equity loan is a second mortgage for a certain amount of money with your home acting as the security for the loan. Lenders usually limit loans to 85% of the value of your home, and you will pay back a home-equity loan just like a mortgage with payments over a fixed term.

These loans offer tax benefits because the interest may be tax deductible for capital improvements on your home. You will get the entire loan up front and pay it off over a term of 15 to 30 years. And because the interest usually is fixed, monthly payments are easy to budget. Rates do tend to be slightly higher than those for conventional mortgages.

No matter what house you choose, BrandMortage is here to help choose the right loan for you to finance your dream home. We offer an extensive menu of loans to fit your needs. We’d be happy to speak with you and introduce you to one of our mortgage bankers today. Please call BrandMortgage at (855) 845-2433 or apply online for a mortgage with us here.