Many borrowers in California end up paying mortgage loan origination fees when buying or refinancing…
With the popularity of HGTV and all those fixer-upper shows, it can be tempting to embark on buying one for yourself or doing a renovation to your own home. But the reality is, for buying a fixer-upper, you may still need mortgage financing.
Buying a Fixer-Upper
Many buyers see the challenge of a fixer-upper as the ultimate in getting a custom home at a price they can afford. Particularly first-time buyers who are on limited budgets, fixer-uppers allow them to buy a less expensive home that has renovation potential. So are there mortgages out there that may see the same potential in that fixer-upper that you do? The short answer is: YES!
Two Major Loan Types Available for Renovators
Both FHA 203(k) rehabilitation loans or FNMA HomeStyle Renovation Mortgages are options for buyers or homeowners looking to purchase or renovate a fixer-upper. These mortgages hold reserves that are put in escrow to fund renovations as they are done.
These mortgages work in a very unique way. Once the mortgage closes, a portion goes to pay for the home and then another portion gets deposited into an escrow account to pay for renovations as they are completed. Like a construction loan, an inspector is sent out with each phase of the work to ensure that the work is completed to code and to the scope of the project.
How Are the Loan Amounts Determined?
The amount of the loan is determined by the appraisal and by the value of renovations to be completed. The appraisal is conducted as if the work has already been done based on the scope of the project and the bid submitted by the contractor who will be doing the work and then adjusted for comparables in the area. These comparables must support any renovations in value.
A Licensed Contractor That is Lender Approved
Renovations must be done by a licensed and insured contractor that is approved by the lender. If you choose to work with a contractor that is not on the lender’s list, that contractor must first become approved. While a contractor’s bid is required for most of the work, the FHA 203(k) program allows a homeowner to make some of the minor repairs with proper evidence of their ability to do so.
How They Are Different
The FHA 203(k) loans and FNMA HomeStyle Renovation Mortgages differ in a few key ways. FHA 203(k) loans require a 3.5% down payment. You can borrow up to the FHA loan limit for your county. The FNMA HomeStyle loan requires a 5% down payment and you are able to borrow within current FNMA loan limits. The FNMA loan will also finance renovations costing up to 50% of the completed appraised value.
If you have your eye on a fixer-upper home, it is possible to get the financing you need. We serve the Walnut Creek area as well as the entire state of California. Call our licensed California mortgage brokers at Bridgepoint Funding at (925) 478-8630 to get any of your mortgage questions answered.