Renovations are expensive, but can be well worth the effort at the end. But the question still remains, how to fund not only buying a house, but renovating it as well?
Whether it’s the customizability, lower price tag, the promise of equity, or the likelihood of a bigger house in a better neighborhood, buying a fixer upper has been an increasingly popular option for years now. Buying a house that needs some work can be anything from a fresh coat of paint, to a few small rooms that could use a refresh, or a complete gut and overhaul. Each of these come with a separate set of problems, and separate price tags.
When you buy a fixer upper it’s a great opportunity to put more equity into your home. But that equity comes with a price. And while the cost of buying a fixer-upper home is typically lower than the move-in ready home, funding these projects out of pocket is a herculean task.
One of the options for financing the fixer upper is a Home Renovation Loan. This is a mortgage with built-in fixer-upper funding. These aren’t as straightforward as a mortgage for a move-in ready home, and have different sets of rules and requirements for each one.
If you’re looking into renovating the home you already own, it may be worth trying a cash-out refinancing option.
Typical Home Renovation Loans
There are any number of different ways to get a home renovation loan, but ultimately there are 3 major options:
- FHA 203(k) is a federally run home loan program aimed for people making lower incomes with smaller down payments than the typical 20% most mortgages require. They come with a higher interest rate, which can end up costing more in the long run.
- VA Renovation Loan programs recently expanded for Vets looking to make reasonable improvements to their current home or new one. Home renovation loans for vets can be wonderful options, either for improving your current home or new one.
- Private Mortgages through your bank. Most banks in Georgia will have mortgage options that could include financing for fixer-uppers. These loans are going to vary from bank to bank and situation to situation and can even fold in some other and more specific to each situation.
- One final option is to save or use money from your previous home sale to only put down the minimum down payment allowed for your home purchase. This will add PMI (private mortgage insurance) to your monthly payment but if you use the money you saved or made off your previous home sale for the home renovations, you can recast or refinance your home once the renovations have completed and your home’s value has increased. The goal for the renovations is to raise your home’s value to at least remove PMI and have your mortgage reflect the equity you have put into the home.
Buying a fixer-upper is a great way to build equity into your life, and helps for first time homebuyers to get the space they need at a reasonable price. While renovations can get expensive quickly, it’s important to do your research.
If you have any, please don’t hesitate to reach out! Frank B. Pallotta Law may not be able to directly answer your financing questions but we can certainly point you in the right direction to the people who can. Reach out to us with your questions. We’re here to help.