Fixer-Upper Listings on the Rise: What You Need to Know About Financing a Home in Need of Renovations

Posted by Laine Smith on 11/16/16 12:50 PM

Topics: Home Renovations Purchasing A Home First Time Home Buyer home buying Home Improvement Home Value

As homebuyer demand continues to outpace supply, a new Zillow analysis found that there are 12% more fixer-upper homes on the market now than there were five years ago. Low existing home supply coupled with competitive homebuyers has created a seller’s market, and with high demand for houses, sellers aren’t feeling the pressure to make updates before putting their home on the market.

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In Zillow’s report, they identified the percent of fixer-upper homes by looking through listings between 2011 and 2015 that used phrases like “fixer-upper,” “TLC,” or “needs work” in the listing description. So what are your options for financing renovations if your home search leaves you with a home choice that is sold “as-is?”

This is where rehab loans come into play for homebuyers who love the idea of making a home their own but need a financing option to do so. Here are three loan options that give you the ability to not only buy (or refinance) a fixer-upper but make the home improvements and renovations to make it livable and energy efficient.

FHA 203(K) 

There are two types of FHA 203(K) loans: Streamline and Standard.

Who’s eligible?

Both types of FHA 203(K) loans can be used for a purchase or refinance but only on primary residences.

What’s the down payment?

FHA 203(K) loans allows borrowers to finance up to 96.5% of the appraised value of their home, which is based on the value after improvements or repairs are completed. This requires a 3.5% down payment from borrowers.

What types of repairs and improvements can be done?

FHA 203(K) Streamline – The 203(K) Streamline is used for homes needing minor, non-structural repairs. There are no minimum repair costs, but the maximum is $35,000 in improvements before move-in. Eligible improvements include repair/replacement of roofs, gutters, downspouts, HVAC systems, plumbing and electrical systems, flooring, exterior decks, patios and porches, minor kitchen/bathroom renovations, etc.

FHA 203(K) Standard – The 203(K) Standard is used for homes needing major rehabilitation. There is a minimum amount of $5,000 worth of repairs, but renovation costs can exceed $35,000, unlike the streamline option. Eligible improvements include all of the streamline improvements, as well as structural alterations, such as room additions, major kitchen and bathroom remodeling, basement finishing, etc.

HomeStyle® Renovation Mortgage

Who’s eligible?

HomeStyle® is available to owner-occupants, as well as purchasers of secondary homes and investors, unlike the FHA 203(K) options. It can be used for a purchase or refinance.

What’s the down payment?

If you’re the borrower and plan to occupy the home, you can put down as little as 5% of the as-completed home value. The as-complete appraisal allows no or low equity homeowners obtain a renovation refinance.

As an investor or purchaser of a second home, see the down payment requirements here.

What kind of repairs and improvements can be done?

Renovations and repairs made with a HomeStyle® loan must add value to the home and be permanently affixed. HomeStyle® does allow financing of luxury items, such as in-ground pools, tennis courts, hot tubs and basketball courts.

While there is no minimum amount of repairs or improvements required, costs are limited to 50 percent of the as-completed appraised value. To learn more about what your financing costs can cover, see here.

If you’re interested in adding value to your home with minor or major home renovations, download our free Rehab & Construction Guide for everything you need to know about the rehab loan options available to you.

Download: Rehab & Construction Guide

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