Today’s housing market is really tight. Historically low interest rates have driven up buyer demand and inventory is extremely limited. According to data from the Greater Lansing Association of REALTORS® local housing inventory at the end of February was 307 units, down 24 percent from January and down 69 percent from one year ago.

With limited options available, buyers may need to consider properties that need a little work. But we all know improvements cost money and, in many cases, buyers have used a lot of their savings for the initial purchase. Spending extra for new flooring or a bathroom upgrade may seem unrealistic.

The good news is there are mortgage programs available that allow qualified borrowers to combine the purchase price with the cost of improvements.

Conventional options
Joe Sambaer, senior mortgage banker with Dart Bank, says when it comes to conventional loans, newer options like Freddie Mac’s CHOICERenovation^® loan can be a great solution.

“Maybe you’ve found a house in the perfect location, but the kitchen needs an overhaul or the flooring needs updating,” he said. “This program may allow you to finance the cost of the home — and the cost of necessary improvements — all in one loan. The loan also has a refinance option for homeowners who want to update their current property.”

Borrowers can finance renovations that cost up to 75 percent of a home’s value after renovations, as long as they qualify for the total loan amount. For example, if you’re buying a $200,000 house that needs $25,000 in repairs or upgrades, you’ll need to satisfy the credit score and debt-to-income requirements for a $225,000 loan.

Freddie Mac’s website says the CHOICERenovation^® loan “allows borrowers to purchase homes and finance the cost of renovations with a single-close mortgage, saving them time and money.”

The program is available for fixed-rate mortgages with 15-, 20-, or 30-year terms and most types of adjustable-rate mortgages. Borrowers must contribute a minimum down payment of 5 percent for a single-family home, and the max amount you can borrow is based on the smaller amount of two calculations: the purchase price plus renovation costs, or the appraised value of the home after the renovations are completed. When utilizing this program, all work must be done by a licensed contractor.

Fannie Mae’s HomeStyle® Renovation loan is another conventional option. According to the Fannie Mae website, “the HomeStyle® Renovation mortgage provides a simple and flexible way for borrowers to renovate or make home repairs with a conventional first mortgage, rather than a second mortgage, home equity line of credit, or other more costly methods of financing.​”

HomeStyle® loans are available in 15- and 30-year fixed-rate mortgage terms, as well as some adjustable-rate mortgage terms. For a single-family home, you may be able to qualify for a down payment of as little as 3 percent.

In most cases, the work must be completed by a licensed contractor. However, Fannie Mae does offer a “Do It Yourself” repair option for one-unit, owner occupied properties with some stipulations.

Government-backed options
The Federal Housing Administration’s (FHA) 203(k) loan may also be worth looking into. There are two types of 203(k) loans: the limited — also called the “streamline” — and the standard. Each loan also offers a refinance option for current homeowners.

The limited option has a max of $35,000 for renovations and can’t be used for major structural work like additions or relocating structural walls. The standard option is for more involved projects that go beyond that $35,000 mark.

In general, the FHA 203(k) program has more flexible guidelines for the borrower, allowing for lower FICO scores and higher debt-to income ratios. But it has stricter guidelines for the property and the improvements. The conventional options may be more lenient on the type of property and work, but they typically require a higher credit score and lower debt-to-income ratio.

While these are all great mortgage programs, Sambaer says stipulations vary and he suggests speaking with an experienced lender to ensure you’re selecting the right option for your projects and your current financial situation.

“And you don’t necessarily have to be taking on a major renovation project to utilize these programs,” he said. “Most of them can be used on smaller-scale cosmetic improvements, like adding new flooring or replacing countertops. However, if you’re looking at large-scale projects — adding a second story, completely gutting a home and moving structural walls, etc. — you’re likely going to need to move to a true construction loan.”

Sambaer also says it’s important to discuss your plans with your REALTOR® so he/she can help steer you in the right direction.

“If you’re writing an offer on a property, but only want it if you can get approval on a purchase/renovation loan so you can make updates, your REALTOR® needs to be aware of that and it may need to be included in the financing contingency,” he said. “In this market, everything needs to be communicated up front and all financial details must be secured because things move quickly, and our goal is to avoid surprises and complete a smooth transaction.” 

For more information on these mortgage options, set up a consultation with an experienced local lender. Visit the Greater Lansing Association of REALTORS^® website at www.lansing-realestate.com for a list of reputable area professionals.