Is Buying a Fixer Upper for You?
Buying a home can be an expensive proposition. But if you are handy, purchasing a fixer upper can be a great way to get a deal on a home.
Even though it sounds like a fantastic idea, keep in mind that it is also a challenge. You need to be willing and able to commit both time and energy to make the necessary repairs. And it is not just a matter of addressing cosmetic issues. A fixer upper can be in a serious state of disrepair or even deterioration. If you do not have the required background and knowledge in construction, or know someone who does, you could be in over your head. Make sure you can handle the work, time, effort, permits, and vision involved before jumping in.
Finding a Fixer Upper
How do you go about searching for the right fixer upper? The same way you would find any home: comb through available listings or find a real estate agent who specializes in foreclosures. Because there are still quite a few areas that are still experiencing a downturn in their local economies, you may have a relatively easy time finding a fixer upper that meets your requirements. You can also look for auctions from your local court-house along with a list of properties that will be auctioned off.
If you are thinking of buying through an auction, be prepared to have a sizeable down payment on hand and make sure you have a strong idea of the types of repairs you are able to complete and how much they could cost.
If you prefer to take more time, a real estate agent will be able to show you fixer uppers that are within your capabilities. You can start by looking at agents’ web sites for a professional who appears to have the right type of property for you and then ask for a showing. The advantage of using an agent is that they will be able to point out issues that you may not have noticed – cracked foundations, pest infestations, or a roofing issue, just to name a few serious structural concerns.
Knowing your construction limitations will go a long way in making the fixer upper process easier. Hiring a home inspector to perform a thorough assessment before buying will help ensure that you are getting a house whose issues you can handle.
Financing a Fixer Upper
Once you found a fixer upper that you want to buy and are confident you can restore is the first step; you then need to find a mortgage lender who will give you a mortgage. Some lenders are hesitant to offer mortgages on homes that require substantial work.
However, the Federal Housing Administration (FHA) has a program, called the 203(k) Rehab Mortgage Insurance, that insures mortgages for the owners of fixer uppers. It combines the mortgage itself and the renovation costs into a single loan. There is also a Limited 203(k) if your repairs are not that extensive. Download our Free 203k Rehab Loan Fact Sheet here.
When you make an offer on a fixer upper, make sure that it is contingent upon receiving 203(k) approval. This ensures that you can back out of the deal in case either you or the home does not qualify for the program.
You also need to locate a lender that is approved by the Department of Housing and Urban Development (HUD) and complete a loan application. You can find a list of approved vendors, like Shamrock Financial, on the HUD website.
Next, you need to create a proposal of the scope of all of the work that the property needs, along with an estimate of the cost of each repair, and submit it to the lender. Be as thorough as you can be because once you are approved for a loan, the loan amount will not be increased, even if you need more funds to complete the repairs. Using a licensed and experienced home inspector to assess the property can give you a much better idea of the work and cost involved.
Lastly, you will have to wait for the mortgage to be approved and then closed.
Making the Right Choice
A home that needs a lot of repair is not something to be taken lightly. Look beyond the initial lower price to the time, money, and sweat equity that you will need to put forth. But if you are up for the challenge and have done your due diligence, a fixer upper can be a great opportunity for the right person.