In reality, many first-time homebuyers will have difficulty in finding a quality entry-level home, as the supply of move-in ready homes is in short supply. Fortunately, there is a way to work around the lack of entry-level homes: look into renovation financing. Renovation financing can be used to invest in a fixer-upper property.
In other words, you can use a renovation mortgage to obtain a home loan that amalgamates the cost of renovations with the purchase price of the home. Here, we will explore how you can expand your home purchasing options with renovation financing.
There are Not Enough Affordable Homes on the Market
Both used and new entry-level properties are hard to come by, with the majority of gains being made in the upscale housing market. As such, many experts suggest that first-time homebuyers look into purchasing and renovating antiquated starter-homes that require repairs given the lack of affordable housing.
Types of Renovation Loans
There are currently two renovation financing options that are very popular, namely, the HomeStyle loan, which is guaranteed by Fannie Mae, and the FHA 203(k) loan, which is currently offered by the Federal Housing Administration (FHA). We should also note that both options provide nigh-comprehensive coverage for both minor and major home renovations/improvements.
Renovation Financing Requirements
An FHA 203(k) loan can only be used for a primary residence. You will also need to place a down payment of at least 10% to procure the loan if you have a credit score of 500 at a minimum.
However, if your credit score exceeds 580, then you may only need to set aside a down payment of 3.5%. Furthermore, the money procured in the loan cannot be used for purposes that the FHA deems a luxury, such as building a sauna or swimming pool.
In addition, 203(k) loans can be broken down into limited and standard loans. Standard loans are meant for major structural work that will exceed $35,000, while limited loans are designed for minor structural work that will not exceed $35,000 in costs.
As for HomeStyle loans, they can be used to purchase and renovate an investment property, second home, or first home. Moreover, to qualify, you will require a credit score of at least 620, with a minimum down payment ranging from 3% to 5%.
In terms of restrictions, there are fewer restrictions with a HomeStyle loan when compared to an FHA 203(k) loan. For instance, you may be able to add a swimming pool or sauna to your property, provided that it is permanently attached to the real estate property.
If you would like to learn more about the benefits of renovation financing and how it can help expand your home purchasing options, please visit Northwood Mortgage on our website or call us at 888-492-3690.