A renovation mortgage will pay for the cost of a home plus repairs or light renovation.
A fixer upper is a home that requires repairs or light renovations before you can resell or live in it. A fixer-upper can allow a buyer to purchase a home below market price, perform the necessary repairs, and end up with a home with a market value higher than the original cost plus the cost of the repairs.
Considerations
For the homebuyer without enough cash for a down payment, closing costs and money to repair a fixer-upper, a mortgage that includes funds to pay for the repairs is the solution. Fixer-upper loans provide extra money to pay for professional home repairs or provide the funds for the do-it-yourself homebuyer to buy supplies to complete the renovation. Renovation mortgages are for homebuyers who plan to keep the home as their primary residence or for investors who want to fix up a home for resale or rent.
Types
The U.S. Department of Housing and Urban Development offers the 203k mortgage program through the Federal Housing Administration lending system for fixer-upper homes. The 203k loans are only for owner occupants and can include up to $35,000 for renovation. Fannie Mae offers two types of renovation mortgages. The HomePath Renovation provides financing for owner occupants who want to by bank-owned real estate from Fannie Mae. The HomeStyle Renovation mortgage finances the purchase of a home plus up to 50 percent of the finished value of the renovation. Investors can use the HomeStyle Renovation mortgage program.
Function
The lender on a renovation mortgage will set aside funds in an escrow account to pay for the renovations and pay the contractor as he completes the work. The HUD 203k program allows the buyer to act as his own contractor. Fannie Mae renovation loans require the hiring of a licensed contractor. A renovation loan provides the funding to purchase and fix up the home in a single loan. The buyer will have a single mortgage payment, and the costs to repair the home will be included in the loan.
Features
Renovation mortgages also allow the homebuyer to include several months of mortgage payment in the escrow repair funds. If the home is not livable, the buyer will have to live elsewhere during repairs. He can make mortgage payments for the new home out of the repair funds, not having to make two housing payments.
Costs
The HUD 203k program requires no down payment. The loan can be for the purchase price of the house plus repair costs. The homebuyer must pay the standard FHA mortgage insurance fees. The Fannie Mae HomePath Renovation mortgage has a minimum down payment of 3 percent. The down payment amount can be a gift or grant from a nonprofit, state or local government.
Tags: down payment, purchase home, Renovation mortgage, 203k program, buyer will
