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3 Mortgages to Finance Renovations for Your Fixer-Upper


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Most homebuyers hope they can afford their dream house. But given how quickly prices are rising and how few homes there are for sale, that's not always the case.

Almost one in five homebuyers last year said they compromised on the condition of the home they ultimately purchased, the second-leading concession after price. Unsurprisingly, first-time buyers made this compromise more often than move-up ones.

"The homes left on the market are the ones that have a few more hiccups," says Pava Leyrer, the chief operating officer of Northern Mortgage Services in Michigan. "But more people are considering them because, frankly, they don't have many options left."

If you find yourself reviewing which of your must-haves you can drop, take heart. Just because the home you buy isn't perfect as-is doesn't mean you can't turn it into your ideal house through renovations. Here are three mortgages that include cash for home renovations, thanks to the federal government.

FHA's 203(k) home loan

The Federal Housing Administration offers its 203(k) home loan that essentially wraps a mortgageand an improvement loan into one. These mortgages come in two flavors: the limited and full 203(k). Which one is right for you depends largely on the extent of renovations and its overall cost.

203(k) limited mortgage

If your improvements won't exceed $35,000, look no further than FHA's 203(k) limited mortgage. This loan will cover cosmetic repairs or upgrades such as new carpeting, painting or simple patches to your roof. It won't cover any structural improvements that require extensive demolition, opening of walls, or any changes to load-bearing walls or the foundation.

These loans comes with adjustable or fixed rates and require only 3.5% down.

To qualify, you must get a contractor's bid for the renovation job. The FHA then must approve the project and your contractor's estimate. A 10% variance is added for unexpected expenses that often arise during renovation. The contractor—who must also be approved by the FHA—must perform all of the work. You can't receive competing bids for other parts of the project from a specialist such as an electrician or plumber.

One of the biggest downsides is how long it takes to close—two to three months, says John Stearns, senior mortgage originator at American Fidelity Mortgage Services in Wisconsin.

"Often the contractor will put something in the bid that's not allowed, so it'll have to be modified for approval," he says. "So, there's lots of back and forth with the contractor." In a hot market where there are multiple bids, the seller may pass on your offer because of that extended timeline.

Major improvements over $35,000: FHA's 203(k) full loan

If the house needs more than cosmetic upgrades, and instead requires a complete overhaul that exceeds the $35,000, consider FHA's 203(k) full loan. Again, the loan combines the mortgage and home improvement loan and is appropriate for major, structural or foundational work—such as remodeling a full kitchen, building an extension or adding another floor. This is a favorite among people buying a foreclosure.

"It's a full-blown construction loan," says Stearns. Luxury upgrades—such as a new swimming pool, outdoor fireplace or tennis court—aren't eligible for the loan.

The full 203(k) requires an FHA consultant, who inspects the property, oversees the work as it's completed and releases the funds to the contractor. Your contractor must be approved by the FHA and must sign off on the project details, including the cost of supplies and labor. The contractor must start work on the project within 30 days of the mortgage closing and complete the project within six months of the start date.

Typically, it takes six months to close this home loan, says Stearns. This may be too long for some sellers to swallow. But in many cases—especially if the house has structural damage—a lender may not provide a traditional mortgage to any buyer until the home is repaired, so a seller may have no choice but to wait.

You're required to put down 3.5%. These loans also require 20% in contingency reserves.

Conventional renovation mortgages

Fannie Mae also offers a mortgage and renovation loan combo called its HomeStyle renovation mortgage. You must put down 3% of the loan amount for fixed-rate mortgages or 5% for adjustable-rate mortgages.

Any renovation or repair is eligible for the loan, but it must be completed within 12 months of the mortgage closing. The contractor must be approved by the lender and provide a construction contract. If you're a DIYer, you can receive 10% or less of the home's value after renovations. The lender will manage renovation funds during the project, and any unused funds will go toward the unpaid mortgage balance.

The article, 3 Mortgages to Finance Renovations for Your Fixer-Upper, originally appeared on ValuePenguin.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.






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