It’s a common lament among first-time homebuyers in almost every housing market: the scarcity of move-in ready entry-level homes. However, there is a solution: broaden your search to include fixer-uppers. By utilizing a renovation mortgage, you can secure a single home loan that encompasses both the purchase price and the cost of necessary improvements.

Lack Of Affordable Homes

Entry-level housing options, whether new or used, are scarce. According to Realtor.com, the majority of housing inventory growth has been in upscale homes. The decline in the construction of entry-level homes is striking: in 2000, 36% of homes built were under 1,800 square feet, but by 2017, that number had dropped to 22%, as reported by the Harvard Joint Center for Housing Studies.

In terms of existing homes, the National Association of Realtors states that resales of homes priced between $100,000 and $250,000 were down 1.9% in October compared to the previous year. Despite the decrease, homes within this price range still accounted for 40.2% of total sales, highlighting the persistent demand.

Given the shortage of affordable homes, it is worth considering the purchase and renovation of outdated or in-need-of-repair dwellings. There are three main types of renovation loans available: the FHA 203(k) loan, insured by the Federal Housing Administration; the HomeStyle loan, guaranteed by Fannie Mae; and the CHOICERenovation loan, guaranteed by Freddie Mac. Each of these options covers a wide range of home improvements, whether major or minor, providing flexibility for homeowners.

Renovation Loans Provide More Options

Renovation loans offer expanded opportunities for homeowners. Both FHA 203(k) and HomeStyle loans can be utilized for both structural and cosmetic renovations. With either loan type, renovation work can commence immediately after closing.

FHA’s 203(k) loan is specifically designed for primary residences. It requires a minimum credit score of 500 and a down payment of at least 10%. However, a credit score of 580 or higher allows for a down payment of just 3.5%. It’s important to note that luxury projects, like installing a swimming pool, are not eligible for FHA 203(k) loans.

There are two categories of 203(k) loans: limited and standard. The limited loan is intended for renovations costing $35,000 or less, which do not require major structural changes. On the other hand, the standard loan is suitable for projects exceeding $35,000 or involving significant structural alterations.

For a 203(k) standard loan, a HUD consultant is required. This consultant assists the homeowner in procuring and evaluating bids, as well as overseeing inspections. Typically, these consultants are contractors, architects, or inspectors.

Fannie Mae’s HomeStyle loan offers the option to purchase and renovate primary residences, second homes, or investment properties. It mandates a minimum credit score of 620 and a down payment of 3% or 5%, depending on owner-occupancy and the borrower’s first-time homebuyer status or income level.

HomeStyle loans have minimal limitations on improvements, as long as they are “permanently affixed to the real property (either dwelling or land),” according to Fannie Mae guidelines. This means that HomeStyle may cover the cost of adding a swimming pool.

Things To Be Aware Of

One common issue is the failure to obtain detailed cost estimates. To avoid exceeding the budget, it is crucial to ensure that the estimates provide specific information about materials and encompass expenses for inspections, permits, and consultant fees, if applicable.

Another pitfall to watch out for is over-improving the home. For instance, if all the houses in the neighborhood have a single story and three bedrooms, it may not be advisable to add a second story with two bedrooms. By doing so, the home will no longer blend in with the surrounding properties, and it will become challenging to accurately assess its post-renovation value due to the absence of comparable houses in close proximity.

Getting Started With Your Home Renovation Journey

Once you have found your dream house, the next steps are crucial to ensure a smooth process. First, select a reputable lender who can guide you through the loan options available to you. It’s also essential to hire a HUD consultant who can provide valuable advice and expertise.

With the assistance of your consultant, obtain detailed estimates from reliable contractors. These estimates will be requested by your lender for documentation purposes. Once the loan is closed, you can immediately commence the renovation work.

Before you know it, your home will be transformed into the space of your dreams. The improvements will be completed sooner than you may have anticipated, thanks to careful planning and execution.

Contact Sword Mortgage To Learn More About Your Options

Call (770) 757-5750 or complete our online form to speak with a loan expert at Sword Mortgage to get help navigating your options and find a loan that fits your needs today.