Financing a fixer-upper
Finally, you've found a house that's in a great
location and falls within your budget, but ... it needs work. Major
work. You're wondering just how you can swing both a mortgage payment
and the cost of repairs or renovation.
Fortunately, you have several financing options available.
These include the Section 203(k) mortgage, available through the
Federal Housing Administration, or FHA. Another product is Fannie
Mae's HomeStyle Renovation Mortgage. In addition, some private lenders
offer their own mortgage products geared to buyers of fixer-uppers.
These programs allow home buyers to finance both a
mortgage and the construction work at one shot.
"These provide a great opportunity for folks
to buy a more affordable house that needs work and at the same time
be loaned the money to bring it up to their standards," says
Tim Doyle, director of government affairs with the Mortgage Bankers
Association of America, a Washington, D.C.-based trade association.
Doing everything at once can save time and money as
it eliminates the need for two appraisals, title searches and the
like. And, while interest rates on the products vary, most are comparable
to rates on standard mortgages.
Perhaps the most well-known product in this group is the FHA's Section
203(k) mortgage, which combines the cost of renovation and the purchase
of the house within one loan.
These mortgages are available across the country,
and contrary to some misperceptions, can be used on homes in urban,
suburban or rural areas, as long as they're at least a year old.
The planned renovation work has to total at least $5,000. Interest
rates are in line with those for typical home loans, says Vijay
Lala, senior vice president of product development and support with
Countrywide Financial Corporation in Calabasas, Calif.
Here's how the process typically works: The borrower,
having found a house that needs renovation, heads to a mortgage
lender that handles 203(k) mortgages. A list of such lenders is
available through the Web site of the Department
of Housing and Urban Development.
The borrower also hires a HUD-approved consultant
who identifies the rehabilitation projects that are most urgent.
Not surprisingly, projects that address health and safety concerns
go to the top of the list. Next in line are projects that enhance
the value of the house. The HUD Web site also lists consultants.
Then, the lender hires an appraiser to determine the
post-renovation value of the house. This is key, because "The
benefit of the 203(k) is that you use future value or the 'after-improved'
value," says Lala.
For example, if a home has a price tag of $100,000
and will require $25,000 in improvements, the loan can be for the
entire $125,000. The portion of the loan earmarked for improvements
is disbursed in installments as the work is completed.
The final amount of a 203(k) loan will be the lesser of two numbers.
The first is the sum of the as-is value of the property plus the
cost of the renovation work to be done and up to six months of mortgage
payments. The second is the value of the post-renovation property
plus 10 percent.
"We take the lower of the two," says Adam
Glantz, a New York-based spokesman with the FHA.
In addition, the loan is subject to FHA mortgage limits,
which vary across the country. In the Chicago area, for instance,
FHA mortgage loans for single-family houses are capped at about
The lender will also consider your ability to handle
the proposed mortgage loan, based on your credit and work history,
says Glantz. He or she will want to be confident that you can handle
the monthly payments, which will be based on the cost of the mortgage
and the renovation work.
Finally, prospective home buyers need to bear in mind
their responsibilities for the success of the renovation.
"The homeowner ultimately is responsible for
ensuring that the work gets done," says Doyle. "If they
don't know what they're getting into and they're not really ready
to manage a project like this, it's better for them to wait, save
their money and buy a house in good condition."
Fannie Mae, a provider of home financing products based in Washington,
D.C., also offers a mortgage product that allows borrowers to finance
the cost of a house and renovation work within one loan. While Fannie
Mae's HomeStyle Remodeler is similar to the Section 203(k) program,
it differs in a couple of key ways.
For starters, the mortgage limits are somewhat higher.
For most of the United States, loans for single-family houses can
go up to $323,000. With a HomeStyle Remodeler loan, that amount
would include both the cost of the house itself and the work that's
And, Fannie Mae doesn't require the use of a consultant.
However, the borrower has to find a licensed contractor who submits
detailed work plans and specifications to the lender, says Jim Matheson,
senior product manager with Fannie Mae. Before signing off on the
loan, the lender determines whether the work proposed is likely
to add value to the property. While Fannie Mae doesn't specify the
types of repairs allowed, the work has to be on structures that
are permanently attached to the property.
Options from private lenders
Some private mortgage lenders have their own programs for borrowers
looking at a handyman special. One is the Plus Mortgage program
offered by Market Street Mortgage Corporation, Clearwater, Fla.
"This program allows people to purchase homes
or refinance existing homes and include the cost of improvements,"
says Randy Johnson, president and chief executive officer.
Plus Mortgage loans can be used with either FHA or
conventional loans. Conventional loans aren't subject to the FHA
Under the Plus Mortgage Program, the mortgage amount
is based on the current market value of the house, plus the cost
of the renovation work. As with the Section 203(k) mortgages, however,
the portion of the loan that covers the renovation projects is disbursed
in installments as the work is done.
In addition, Market Street checks the contractor's
"We look at their corporate credit rating, liquidity
position and overall experience," says Johnson. "We want
to make sure that we're comfortable with their qualifications."
During construction, the borrower pays prime plus
1 percent. When the loan converts to a standard mortgage, the interest
rate is the same as on any other similar mortgage.
Once the renovation is complete, the loan for the
entire amount is modified to a standard mortgage.
"It just requires signing a modification page,"