Ask the Loan Man by Hans Bruhner — February 2020
The easiest way to buy a fixer-upper is you have a decent amount of money and you buy a house that needs cosmetic fixing up. That way, you can buy the house with a regular loan and use your own money to remodel. Mortgage lenders will not lend on homes that are not in at least average condition so if the house is in the below-average condition you may need a renovation loan.
If the home needs more work or if you do not have a lot of money, there are several options. Let’s say that you qualify to buy a move-in ready house for $500,000 with 10% down and you can’t find anything you like. Then you find a house that is only $400,000 but needs $100,000 worth of work. You can buy that same house with the same $50,000 down payment. We will finance the purchase AND the fix-up costs as well. That is basically how it works.
The good news is that right now, people working in home loans have a lot of options in the area of fixer-uppers and construction lending. Not everyone has all options available to them or they choose not to offer them since they are a bit more work than a normal loan, so you need to ask if your mortgage professional offers them.
Now that you have the basics, you need to know that there are loan programs that you can put down just 3.5% of the purchase price and 3.5% of the fix-up costs and finance 96.5% of the whole thing. This is for owner-occupied homes only.
AND there are programs where you can buy an investment property with as little as 15% down and 15% of the fix-up costs.
A renovation loan like this is basically a light construction loan. The first part of the escrow process is pretty much the same as a regular purchase but you need to get a contractor’s bid for the work to be performed.
You close escrow at the negotiated purchase price and at that point the Realtors and the seller are done with the transaction. The buyer, contractor and the mortgage company work together to complete the work needed on the home,as well as any touches that you want to do. You can make additions to the home, do a complete remodel or simply replace a roof and put in new carpet. It is completely up to you as long as you qualify for the final loan amount and the value of the final project fits in the box.
It can be really great to fix up a house the way you want it but you need to be aware of a few things as well. These take a little bit more time because you have to deal with a contractor and so if the house can be financed without a renovation loan, you may have difficulty getting a seller to agree to the extra time for your cosmetic remodel.
The other thing to be wary of is that a remodel is a lot of work. So you will have a longer escrow with more moving parts as well as a construction project after you buy the house.
Need to know more? Please send me your real estate and mortgage-related questions. I am happy to answer you and it may become the topic of a future article.
Hans Bruhner (NMLS 243484) is a Mortgage Advisor for Finance of America Mortgage (NMLS 1071). Both are licensed by the Department of Business Oversight under the CRMLA. If you have a question, please contact Hans at(707) 887-1275 or hans@hansblog.com
