The Best Fixer-Upper--Part V: How to Finance

Unlike the HGTV flipper's, real life renovators need money to buy materials and pay subcontractors . What type of financing options are available for renovations?

Two of the largest sources of renovation loans are the 203K FHA loan and Fannie Mae's "Homestyle Renovation Mortgage. Private lenders and banks also offer their own mortgage products geared to buyers of fixer-uppers.

These loan programs allow buyers to finance both the mortgage and the construction loan in one shot. Buyers can find a more affordable home that needs work and borrow the fix up costs at the same time.

The 203K loan can be used across the country, as long as the property is at least one year old and the planned renovation work totals at least $5000. The buyer must hire a HUD approved consultant who identifies projects that are the most urgent. The lender then appraises the property at the future, after-improvement value, versus the value today.

For example: If the house costs $100,000 and requires $25,000 in
improvements, the loan will be for the entire amount of $125,000. The
$25,000 portion earmarked for improvements will be disbursed in
installments as the work in completed.

The Fannie Mae Remodeler loan is similar to the 203K, but doesn't require the use of a consultant. The borrower has to find a licensed contractor to submit a detailed scope of work, material specifications and finish costs to the lender. Then, the lender decides what the final value of the proposed work will be.

Some private lenders offer their own mortgages, or Plus type mortgages. These loans allow people to purchase homes or refinance existing homes and include the cost of improvements. The Plus loans are based upon the present value of the home and then cost of renovation is added to it.

One feature all loans for fixer-uppers have in common is the disbursement criteria for the renovation. The portion of the loan earmarked for improvements is not given to the borrower at closing. The money is held by the lender and is disbursed in installments, as the work is completed.

If you want to buy a home and fix it up, these type of loans can make it happen for you. The points, closing costs, loan terms and interest rates for home improvement loans are similar to the rates found on any other loan.