Loan types for home that needs work


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Dear Dr. Don,
My wife and I found a house for sale that we like. It needs some finishing touches to make it a comfortable home. For example, we need to have flooring and trim installed. Some doors require new knobs. Some updated light fixtures are also needed. In terms of materials, everything we need to finish the job is already in the house. I have a carpentry background and can complete the finishing work myself. But the real estate agent said we would have trouble getting a mortgage because the floors aren’t completed. Is this correct?

There’s wood subflooring in place. It just needs to have the tongue-and-groove planking added.

— Darryl Doubtful

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Dear Darryl,
The real estate agent is correct about conventional financing if the home can’t qualify for a certificate of occupancy. The certificate protects the lender. When it is provided, the document shows that the structure is compliant with local building codes and is habitable. There might be some programs that can help you accomplish what you want to do.

While you could look at qualifying for a Federal Housing Administration 203(k) rehabilitation loan for financing, it requires a certificate of occupancy in place for at least one year.

A Fannie Mae HomeStyle Renovation Mortgage might be a better option. It allows borrowers to include financing for home improvements as part of a purchase or to refinance an existing home. It also may be possible to finance the property with a construction loan. Once you’ve completed the work and get the certificate of occupancy, you apply for a mortgage.

A construction-to-permanent loan, like the Fannie Mae product, requires a single loan closing, which should save on closing costs. It would also prevent you from shopping for the best interest rate on permanent financing.

One key question is whether the loan requires you to hire a contractor to complete the work, or if you can do it yourself. Lenders can be less willing to finance do-it-yourself home-construction projects. Considering all those costs, this home might not be such a good deal for you.

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