If you're buying a home that needs a little TLC, a typical fixed-rate mortgage isn't going to help you pay for repairs.
Your lender isn't going to approve a $300,000 loan to buy a home that's only worth $250,000. And, while homeowners sometimes use home equity loans to remodel, you can't get a home equity loan when you have no equity.
This can be a big obstacle for buyers who don't have extra cash to make needed renovations or repairs before moving in.
But there are two loan programs that can make your dream of rehabbing a fixer-upper a reality: the Federal Housing Administration's 203(k) mortgage and Fannie Mae's HomeStyle Renovation mortgage.
The programs achieve the same goal — providing homeowners with a mortgage and access to money to make necessary improvements — but come with different requirements and best serve different types of buyers.
FHA 203(k) Mortgage
This type of financing is ideal for borrowers who either have little money for a down payment or who have an average or slightly below-average credit score.
The FHA requires a credit score of at least 580 if you want to make the minimum down payment; if you have 10% down, your score can be as low as 500. Lenders may have higher requirements.
Fannie Mae HomeStyle Renovation Mortgage
This type of financing requires a down payment of just 5% if you're buying a single-family home with a fixed-rate mortgage.
With a down payment of less than 25%, you'll need a credit score of at least 680. If your debt-to-income ratio is higher than 36% but less than or equal to 45%, your credit score needs to be 700 or higher.
You'll have 12 months to complete the work, and there's no minimum amount you must devote to repairs. You can use the money for repairs, remodeling, renovations or energy improvements. The only restriction is that the changes must be permanently affixed to the property and add value.
As with any renovation loan, you’ll want to make sure that you’re finding the right loan product for your current situation. Schedule a 15-minute consultation today to see what options would make the most sense for you!