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Posted in: First time homebuyer tips, Getting a mortgage, Buying a home

How first-time buyers are nabbing their dream homes for (way) less

first time buyers renovation loans

If you’re a first-time buyer stressed out by the low inventory (and escalating bids) in the Twin Cities metro, it may be time to switch up your strategy. While a move-in ready home is ideal, there are fixer-uppers on the market — plus, there’s a loan option that comes with built-in remodeling money.

Here are insights you can use to secure a renovation loan and land your own HGTV-style dream home.

What is a renovation loan?

Many budding homeowners give up on fixer-uppers because they assume they can’t afford the home and the renovations that it will require.

However, many first-time buyers are finding relief by leveraging a renovation loan from the Federal Housing Administration (FHA). An FHA 203(k) loan combines a standard FHA mortgage with a construction loan, allowing buyers to purchase a starter home and cover the remodeling costs required to make it their own.

How do you determine the total of a FHA 203(k) loan?

Your lender will help you determine the proper amount for your renovation loan. But typically, 203(k) borrowers aim to secure a loan for the home’s future appraised value (after the renovations have been made).

Streamlined 203(k) loans

There are two types of 203(k) loans. The first, called a “streamlined” 203(k), is for smaller repairs that will total less than $35,000.

Streamlined loans cover:

  • Remodeling to existing rooms
  • Basement refinishing
  • Roof repairs
  • Addition or replacement of a deck or patio

Standard 203(k) loans

A standard 203(k) loan is for repairs that will exceed $35,000. Often, these loans are needed when the property has structural damage or the new owners plan to “gut” it completely.

Standard loans cover:

  • Adding new rooms
  • Relocating load-bearing walls
  • Fixing damages to the structure of the property

Are there limitations?

Yes, FHA loan limits vary by county, and the total of the 203(k) loan must be within the county limits.

How do I qualify for the loan?

Every borrower’s finances differ, and your lender will evaluate your savings, credit and employment history to determine if you’re a good fit for an FHA loan.

Typically, FHA borrowers have:

  • A credit score of 580 or higher
  • 3.5 percent for a down payment
  • A front-end debt-to-income ratio between 28-33 percent
  • A back-end debt-to-income ratio between 36-42 percent

Learn how to calculate your debt-to-income-ratio.

One final tip: Start planning repairs ASAP

House Hunters junkies are at an advantage when it comes to securing a 203(k) loan. These renovation loans require that repairs begin within 30 days after closing, and are completed within six months after closing. To stay in bounds on your loan, be sure to secure a contractor with 203(k) experience and create a plan that gives you the home you’ve been dreaming of.

Questions?

Whether you want to renovate your way to paradise, or purchase a move-in ready home, we can help. Reach out today for help securing a mortgage, or to discuss getting pre-qualified.

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