Money Matters

Buying a fixer-upper: What loans are available?

Written by

Crissinda Ponder


August 5, 2019

If you’ve always dreamed of knocking down walls and bringing a distressed home to life just like your favorite home renovation TV stars, buying a fixer-upper property might be a worthwhile investment.

The hardest part? Paying for it all. Most traditional mortgages won’t allow you to finance the cost of significant repairs and renovations when you buy a home. This puts you on the hook for not only supplying the money for a down payment and closing costs but finding enough in the bank to cover renovations.

Fortunately, you have options.

Why would you buy a fixer-upper?

Fixer-upper homes offer a lower price point when compared to their move-in ready counterparts.

“Fixer-uppers are more affordable than a new home and the buyer can still make it their own,” said Denise Supplee, a real estate agent with Long & Foster Real Estate in Doylestown, Pa. “If you are stringently budgeting with your upgrades and cognizant of the values of neighboring properties, buying a fixer-upper can make a good investment as well.”

Plus, competition may not be as stiff. Houses needing a lot of work tend not to sell as quickly because some buyers rather not put a lot of time and money into renovations, Supplee said.

Fixer-uppers can also offer the chance to build equity at a faster pace. Although home values arE rising across the U.S., it can take years for a traditional property to appreciate in value, if its worth increases at all. With a fixer-upper, renovations may increase the value of the home more quickly.

Fixer-upper loan options

If you’re considering buying a fixer-upper, here are some loan options that cover both the cost of buying the property and renovating the home. Keep in mind that these loans may come with additional fees compared with traditional mortgages, since the lender may need to make additional inspections and disbursements during the construction process.

Fannie Mae HomeStyle® renovation loan

Fannie Mae’s HomeStyle® Renovation Mortgage lets homebuyers and existing homeowners combine their home purchase or refinance with financing needed for renovations and repairs. These loans come with 15- and 30-year fixed-rate mortgage terms, as well as some adjustable-rate mortgage terms. For a single-family home, you may be able to qualify for a down payment of as little as 3%.

To finance extra costs associated with renovations, borrowers frequently opt into Fannie’s Community Seconds® mortgage on top of the HomeStyle® loan. With that combination, you can finance up to 105% of the home’s purchase price.

Community Seconds® funds come from federal agencies, states, local governments and nonprofit organizations to help buyers cover the costs of purchasing a home, including closing costs, down payment and renovation expenses.

You’ll need higher credit scores to qualify for lower down payments. For example, if you’re buying a single-family fixer-upper, and you’re putting down less than 25%, you’ll need a 720-credit score or higher. If your down payment is at least 25%, your minimum credit score is 680. HomeStyle® purchase loans require a 15% down payment for two-unit properties and 25% down for three or four-unit properties.

Freddie Mac renovation mortgage

Freddie Mac’s renovation mortgage program caters to homebuyers and homeowners looking to rehabilitate, renovate, repair or restore an existing home through a purchase or refinance transaction.

Renovation loans are available for fixed-rate mortgages with 15-, 20- or 30-year terms and most types of adjustable-rate mortgages. Borrowers must put down a minimum 5% for a single-family home, 15% for a two-unit home and 20% for three- or four-unit homes.

The most you can borrow is based on the smaller amount of two calculations: the purchase price plus renovation costs, or the appraised value of the home after the renovations are completed.

If you’re putting down less than 25% on a single-family home, you’ll need at least a 660-credit score. The required score is lowered to 620 for buyers putting down 25% or more.

FHA 203(k) loan

Like Fannie and Freddie, the Federal Housing Administration offers 203(k) loans to homebuyers and existing homeowners who want to purchase or refinance a home and renovate it with a single mortgage.

An FHA 203(k) loan provides a single, long-term, fixed- or adjustable-rate mortgage that covers both the purchase and rehabilitation of the property. Because the mortgages are federally insured, lenders may be more willing to provide loans. This can be helpful when the initial condition and value of the property wouldn’t be good enough for traditional lending.

Supplee said buyers must work with a licensed contractor to provide a detailed listing of the costs associated with the repair or renovation. In some cases, DIY may be possible, but the buyer will need to provide a full list of materials, complete details of the project, local permits and all of the supporting documentation that a contractor would provide.

There are two types of 203(k) loans: limited and standard. A limited 203(k) loan is for smaller rehab jobs that cost $35,000 or less, while a standard loan is for more costly renovations.

The U.S. Department of Housing and Urban Development (HUD) provides FHA 203(k) loans through its approved lenders. You can search for an HUD-approved lender in your area using the search tool on HUD’s website.

Other financing options

Don’t want to combine your home purchase with renovation financing in a single loan? You have alternatives.

You could apply for a personal loan, which means the financing wouldn’t be backed by your home. Loan amounts typically range from $1,000 to $50,000 but may go higher depending on the lender.

You can also apply for an unsecured personal line of credit, which works like a credit card. Once approved, you’re granted a credit line of a certain amount and only pay back the amount you borrow, plus interest. Once the balance is paid back, you’re allowed to reuse that available credit.