Fixer Upper Loans and Financing

If you are paying attention to the Vermont real estate market lately, you know that competition is fierce and homes fly off the market after only a weekend. In this sellers’ market, many of our buyers who are qualified and approved for conventional loans are simply striking out with their offers due to multiple bids or competing cash offers. 

As a buyer in this market, you might be fending off buyer fatigue and wondering if you should start looking at old farmhouses or a “DIY special,” considering the lower price tag, smaller pool of competing buyers, and dream of a home built to your taste. Contrary to popular belief, a conventional loan will not provide additional funds to cover updates and repairs. 

If you’re interested in a fixer-upper, you should talk to your lender to see if you qualify for a rehab or construction loan instead. 

Construction and rehab loans combine the costs of the home and renovation into a single mortgage. A number of products are available, from your local bank to the US Department of Agriculture. Take a look at these renovation products and talk with your Vermont Real Estate Company agent about laying out a buying plan. 

Getting an estimate for the price of renovations early in the process is key with any renovation or rehabilitation loan. This estimate will help determine which type of loan works best and determine if you qualify for the mortgage, since borrowers need to qualify for the purchase price and the cost of renovations. 

Have questions about rehab loans? Connect with Justin Wydra at Vermont Mortgage Company.

Rehab Loan from Your Lender

Speak with your Vermont real estate agent and your lender about what options are available. Typically lenders require 20% down and will offer an adjustable-rate mortgage (ARM); they will often offer new terms on a conventional loan or ARM. An ARM is a loan with an interest rate that varies depending on the market. These loans usually have a lower interest rate during a three to seven-year introductory period before adjusting to market rates thereafter. 

Once renovations are complete, homeowners can either refinance their mortgage to more favorable terms or roll their existing loan into a conventional mortgage based on the money already spent. 

FHA 203(k) Rehabilitation Mortgage Insurance Program

The Federal Housing Administration (FHA) offers 203(k) loans as an affordable and flexible option for homebuyers and protects lenders by providing insurance before the completion of the renovation. A Standard 203(k) can “be used for a home that requires structural repairs or major remodeling” and can apply to: 

• improvements like complete kitchen and bathroom remodeling, 
• new roofing, siding and gutters, 
• replacing windows or flooring,
• Repairing structural damage,
• and more

FHA guidelines also allow you to knock down the existing structure and build new, so long as the foundation remains the same. These loans usually come with a lower down payment requirement, which in turn will require private mortgage insurance (PMI) until you have 20% equity in the home. What’s more, contractors must be properly licensed and go through an FHA screening. 

Fannie Mae HomeStyle Renovation

Fannie Mae’s HomeStyle Renovation mortgage product is similar to the 203(k) but offers more flexibility in what homeowners can build with the money, for instance, a swimming pool or an in-law suite! Down payments can be as low as 3% for single-family, primary homes. While Fannie Mae guidelines say DIYers can do up to 10% of the required work, most lenders will not allow borrowers to do any of the required work.

Fannie Mae, as a government entity, does not provide homebuyers with this type of loan. Rather you will need to work with a bank or lender who offers HomeStyle loans.

Freddie Mac CHOICERenovation Mortgage

The Freddie Mac CHOICERenovation mortgage product is very similar to its Fannie Mae counterpart. It’s not as stringent as the 203(k) loan and requires a down payment of 5% for single-family homes. The biggest difference between CHOICERenovation and HomeStyle is Freddie Mac’s coverage of ‘resilience items’ such as flood retaining walls and other disaster protection upgrades. 

USDA Renovation Loan

USDA Renovation Loans are for eligible rural and suburban homes for households who make under $110,000 annually. Nearly all of Vermont is eligible for a USDA Standard renovation loan, except Burlington, South Burlington, Essex Junction, and Winooski. USDA Standard Renovation loans cover things like roof replacement, new septic systems, new walls, weatherization upgrades, and more. Unfortunately, if you have your eyes set on a pool you’ll need to stick with Fannie and Freddie, USDA only covers repairs to an already existing pool. The biggest benefit of the USDA loan, if you qualify, is that there is no down-payment required.

VA Renovation Loan

To qualify for a VA renovation loan, you need a certificate of eligibility (COE) that verifies your minimum service requirements. Typically, veterans and active members of the service are eligible if they served 90 consecutive days during wartime or 181 during peacetime. Some surviving spouses are also eligible. 

VA renovation loans allow for as little as 0% on a down payment and up to $50,000 in rehabilitation work including minor structural repairs. 

How to Decide

To successfully navigate the challenges of financing a fixer-upper whether you’re pivoting your home search or looking to renovate from scratch, it's essential to research your options thoroughly and work closely with your Vermont Real Estate Company agent to develop a solid plan that aligns with your budget and vision for your dream home. With the right approach and financing, you can transform a fixer-upper into the home you've always wanted.