In an earlier blog we talked about how, with the low housing inventory nationwide, it can be very difficult to find a new construction home that fits your family’s needs. And, with the recent rise in home mortgage interest rates, new home construction has dramatically slowed, which only increases the amount of time it will take for you to find, and actually move into, a newly built home.
Given the limited number of available properties, if you’re a buyer in today’s market, you may want to expand your home search to consider purchasing an existing older home that may need some work to become your dream home. Many buyers are starting to consider home renovation loan options as the way to get their perfect home.
Why Consider an Older Home
The existing home is more likely than a newly constructed home to be situated in a neighborhood with mature trees and parks close to the conveniences you would prefer, has well-established schools, and has a community feel. Consequently, the neighborhood’s advantages will be more predictable than an up-and-coming area.
In some of the most desirable neighborhoods, older homes have a character with a traditional look and classic styling, which can be highly sought after. Some people even prefer to purchase a historic home, with quirky features and unique charm. But with older homes, the amenities may be lacking, and the infrastructure may be dated compared to new construction – which is where home renovation loan options help you make an older home your perfect dream home.
Land used to be more affordable, so older homes often have larger yards. The property is most likely filled with mature landscaping, that includes trees and bushes that have been cared for over several generations. This has been proven to raise the value of a home and can make its homeowners more comfortable due to the emotional benefits of being in a home with more surrounding greenery.
On top of their charm, another reason to consider an older house is cost. Older houses tend to cost significantly less upfront than their newer counterparts. The price of a newly built home is often higher than that of an older home by a staggering 30% or more. So even factoring in the costs of renovations to make it your family’s dream home often the total cost will not exceed the price of a newly constructed house.
If you’re ready to consider an older home that needs updates, or even a significant makeover, the question is, how to pay for it.
Home Renovation Loan Options
Securing a mortgage for a “fixer upper” property wasn’t always easy. In the past, the process could be very costly, with improvement loans with high interest rates, short repayment terms, and balloon payments.
Today, that’s no longer the case. Now there are mortgage products called rehab loans that enable borrowers to finance the purchase of their home and include the costs of the renovations in a single loan. A rehab loan benefits borrowers and lenders since it ensures a single, long-term loan that covers the purchase and renovation of a home.
Today’s two predominant types of rehab loans are FHA 203(k) Rehab Loan and the Fannie Mae Homestyle Loan. Let’s take a closer look at each of them.
FHA 203(k) Rehab Loan
An FHA 203(k) rehab loan packages your home improvement costs and mortgage into a single loan. But with an FHA 203(k), you don’t have to apply for two separate loans or pay closing costs twice. Instead, you finance your home purchase and home improvements simultaneously when you buy your house.
Designed specifically for older and fixer-upper homes, FHA 203(k) rehab loans are great when you’re buying a fixer-upper and know you’ll need loan funding for home improvement projects soon. And these loans are backed by the federal government.
Additionally, the FHA 203(k) loan is a convenient way to purchase your home without making a large down payment or paying higher than market interest rates. And you can apply with a less-than-perfect credit score.
As with all FHA mortgage products, your home loan is backed by the Federal Housing Authority. This allows for more leniency than a conventional loan. While 203(k) loans save borrowers time and money, they also benefit the lender by allowing them to have the loan guaranteed by the FHA, even though the property has not yet been renovated, and the condition and value of the house may not yet offer adequate security.
The types of rehabilitation that borrowers may make using Section 203(k) financing include:
- Structural alterations and reconstruction
- Modernization and improvements to the home’s function
- Elimination of health and safety hazards
- Changes that improve the appearance and eliminate obsolescence
- Reconditioning or replacing plumbing; installing a well and/or septic system
- Adding or replacing roofing, gutters, and downspouts
- Adding or replacing floors and/or floor treatments
- Major landscape work and site improvements
- Enhancing accessibility for a disabled person
- Energy conservation improvements
Fannie Mae HomeStyle Loan
Fannie Mae’s HomeStyle Renovation Mortgage is an all-in-one purchase loan and home improvement loan. This renovation loan enables home buyers to borrow both the purchase price of the home and any renovation costs and wrap it up into one mortgage loan amount.
It’s a great home renovation loan option for buying a property that needs a little – or a lot – of work, whether you’re buying a home to live in full-time, part-time, or as an investment property. The HomeStyle Renovation loan is great for home buyers who want to renovate an existing structure and pay the renovation off each month when they pay their monthly mortgage.
The HomeStyle Renovation loan is super flexible when it comes to the repairs and upgrades you can finance. You can:
- Gut the house and redo the interior, including the bathrooms and kitchen.
- Build an accessory dwelling unit—a smaller separate residence—on the property for your mom or dad to live in, or to rent out.
- Add permanent landscaping features, like trees or a retaining wall.
- Add luxury features, like an in-ground swimming pool or outdoor kitchen.
In short, you can do just about anything, as long as it will be permanently affixed to the property. And you don’t have to go big: If you just want to finance new floors and new paint, that’s fine too.
We Can Help
The goal of the Spectrum Real Estate Consultants Team is to facilitate homebuyers in achieving their dream of homeownership. We can help you find a home that leaves enough room in your budget to renovate it to your liking.
We are the top producing team of Realtors at Keller Williams Realty Leading Edge completing over 900+ successful transactions since 2015. Our mission is to provide our clients with world-class service while simplifying the Real Estate transaction through experience, technology, and effective communication.
And, we have built a referral network of trusted mortgage professionals that we know can take care of your mortgage needs with integrity we are happy to refer you to. So, let’s connect and get you on the road to owning your dream house today.