Maybe you’re not one of those house hunters looking for “move-in ready.” In fact, you’d love to invest some sweat equity and put your own stamp on your new home. You’re ready to get your hands dirty and put in the work, but the question is, how do you finance this dream if you don’t have a lot of extra cash on hand? Are there loans available for borrowers wanting to tackle a fixer-upper?

Before we get into the options, let’s talk about why someone might choose a fixer-upper. In the past few years, the real estate market has definitely favored sellers. Well-priced, move-in ready homes have gone quickly, sometimes above list price. For some, considering a fixer-upper could mean a chance to get into a home for less money with less competition.

While there may be buyers open to this idea, coming up with extra cash for renovations can be difficult, especially for those using a significant portion of their savings just for the down payment.
Aron Clark, senior mortgage banker with Dart Bank, says there are loans available to finance both a purchase and renovation, but he says a lot of buyers are simply unaware of the options.

“Not every lender offers these products, and there are also a lot of misconceptions about the process and the qualification requirements, so I think a lot of buyers just assume it’s not possible,” he said.

For example Dart Bank offers a few different options, depending on the scope of work. Their Charm Loan is geared towards borrowers taking on a purchase with more cosmetic type upgrades, maybe new flooring or a new roof...something that can be done rather quickly. On the other hand, for those looking at a purchase requiring a full-blown renovation — putting on an addition, finishing a basement, overhauling a kitchen — Dart has a purchase/rehab loan as well.

Both of these are conventional mortgage products, and the qualifying requirements are the same as with any conventional loan. Typically, you need at least 5 percent down, and a licensed builder must be involved. The builder provides a contract to the appraiser and the loan amount is based on the appraised home value after the planned improvements.

If the project is large and will take longer than 30 days, the loan works similarly to a construction loan where the builder takes draws. The buyer pays interest only during the renovation and the loan converts into a traditional loan at the end of the project.

“The biggest challenge I’ve seen is getting all the information from the builder in a timely manner,” said Clark. “We need the plans and dollar amounts before we can submit everything to the appraiser. If there is a hold up on that end, it can take a bit longer to close than a traditional mortgage.”

Clark says one of the great things about utilizing this loan is that there is some built-in protection for the client.

“When a builder needs to get paid, we send an appraiser out to make sure the builder has actually done what they’ve said they’ve done,” he said. “It’s a system of checks and balances that really protects the consumer.”

Other area lenders may offer their own conventional purchase and renovation loans. There is also a government-backed option through the Federal Housing Administration’s 203(k) program. However, not all banks provide this loan and, in some cases, it can actually be a more expensive and harder to obtain.

“The great thing is these programs aren’t just for new buyers,” said Clark. “Current, qualified homeowners may be able to take advantage of a renovation loan as well. We’ve handled several refinances for homeowners who didn’t want to move, but needed to make some changes so their house would better fit their needs.”

Current homeowners looking to renovate may also consider a home equity line of credit (HELOC) or a cash-out refinance. But, with any of these options, it’s best to sit down with a professional, local lender to ask questions, crunch the numbers, and go over the pros and cons.

If you’re interested in finding out more information about these and other available loan options, visit the Greater Lansing Association of REALTORS® website at www.lansing-realestate.com for a listing of experienced area mortgage professionals.