top of page

Fixer Uppers: Everything you need to know!

What you Need to Know About a Renovation Loan

Every channel on TV these days has a show about people renovating their home or buying a “fixer-upper” to restore. You may have wondered how it was possible to raise the money needed for such extensive projects. Perhaps you thought the show paid for it.

But the truth is, most people buying a fixer upper to immediately restore it and move-in are able to do so because they have acquired what’s known as an FHA 203(k) loan. The colloquial terms are either “the renovation loan” or “the rehab loan.”

What is a Renovation Loan?

An FHA 203(k) (also referred to as a renovation loan) was established in 2017 as a means for homebuyers to purchase a property that needs a lot of work. There were several reasons why this loan was established. Improvement loans had high interest rates, with balloon payments, and short repayment terms. Another reason was social development, as per FHA’s site:

“the Department’s primary program for the rehabilitation and repair of single family properties. As such, it is an important tool for community and neighborhood revitalization and for expanding homeownership opportunities.” The rehab loan can also assist homeowners. It helps to finance the purchase or refinance, along with the renovations, under a single mortgage. It benefits both parties since it ensures the single loan will be long-term (whether it’s fixed-rate or ARM) and cover either the purchase or refinance and renovation of a property.

Guidelines and Requirements

The FHA 203(k) has some restrictions and guidelines that must be followed in order to receive the loan. This ranges from relatively small expenses to the entire reconstruction of the home. The restrictions can cover the type, amount, and cost of rehab. Here are a few examples of acceptable rehab:

  • Structural reconstruction

  • Elimination of health hazards

  • Major landscape work

  • Flooring

  • Roofing

  • Plumbing

  • Gutters

  • Air Conditioning

  • Disabled accessibility

  • Energy conservation

For the full list, visit the US Department of Housing and Urban Development (HUD) 203 (k) page. Applications must be submitted through an approved FHA lender.

Duly note there are specific 203(k) contractors that can be hired to manage the entire job. Homebuyers/owners should never piecemeal the work out. The General Contractor (GC) always handles that for you and has the proper experience. Additionally, the loan will include the contractor’s rate.

The Benefits of a Rehab Loan

There is a multitude of advantages to refinancing with a renovation loan. You are essentially creating your own home equity with upgrades and repairs. Additionally, benefits can include:

  • Buying an older home for a low cost and great interest rates.

  • A high credit score isn’t always necessary.

  • You can renovate according to your own style and needs.

  • Increased equity.

  • A large down payment is not necessary.

  • Your home loan is insured (this allows for more leniency on a conventional loan)

  • Rehab loans tend to save borrowers time and money.

  • Part of the loan includes cost of living and rent while renovating.

  • The program assists areas where natural disasters occur with extensive damage.

The FHA 203(k) is there to help and make the entire process a little easier for borrowers. However, there are always a few challenges to a big project. People should still be aware that buying a property that requires renovation takes commitment. Although you can purchase the home, you cannot cross the threshold or move-in until the work is done. The insurance company would not like that. Additionally, bringing in a different contractor could jeopardize the contract.

Ultimately, it’s about understanding the process and knowing if it works for you. Study the guidelines to ensure that you meet them and find an FHA lender to file an application. Once the ball is rolling, all you have to do is sit back and watch the value of your property rise.


Commenting has been turned off.
bottom of page