How first-time homebuyers can land a home for less

Key insights

• Some first-time homebuyers may want to consider purchasing a fixer-upper using a renovation loan.
• There are conventional renovation loan options, but an FHA loan is more common.
• There are two types of FHA 203(k) renovation loans, and they have different requirements.
• You will need to qualify for an FHA loan to be eligible for that loan type.
• If you don’t qualify for FHA, other conventional renovation loan options may be available.

If you’re a first-time homebuyer in Minnesota or Wisconsin, you’re probably wishing you had more options and less competition for those move-in-ready homes. It may be time to switch up your strategy and consider a fixer-upper. Did you know there’s a loan option intended for buyers who will be renovating their homes?

Here’s what you need to know about how a renovation loan could help you land your 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 have the option of leveraging a renovation loan from the Federal Housing Administration (FHA). An FHA 203(k) loan combines a standard FHA mortgage with a loan that covers the costs of renovations and repairs, allowing buyers to purchase a starter home and cover the remodeling costs required to make it their own.

If you don’t qualify for an FHA loan, there is also a conventional renovation loan available. But since the more common option is an FHA loan, we’ll take a closer look at those loan options in this article.

How do you determine the total of an 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).

There are two types of 203(k) loans, designed for non-structural and more extensive renovations.

1. Limited 203(k) loans

A Limited 203(k) loan is designed for smaller repairs and non-structural projects, with a maximum loan amount of $35,000 and no minimum cost requirement. Limited 203(k) loans are meant for use on projects such as flooring, painting, appliances and other non-structural improvements and repairs.

2. Standard 203(k) loans

A Standard 203(k) loan is designed for major rehab projects, and the minimum cost of the renovation must be at least $5,000. Often, these loans are needed when the property has structural damage, new rooms are added or other major renovations are needed.

Are there limitations?

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

• See Minnesota FHA loan limits by county
• See Wisconsin FHA loan limits by county

How do I qualify for the loan?

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

Typically, FHA borrowers have:

• More flexibility when it comes to credit score (500 - 580, depending on your down payment amount)
• Options for a lower down payment (less than 20%, but at least 3.5 - 10%)

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

Familiarize yourself with other requirements

There are some restrictions and requirements for using 203(k) loans, including:

• FHA mortgage insurance
• Must be the owner’s primary residence
• Luxury renovations are often not allowed
• DIY work is often not allowed
• A 203(k) consultant may be needed
• Renovations must begin within 30 days of closing
• Renovations must be complete within six months of closing

Questions?

Whether you are interested in purchasing a fixer-upper using a renovation loan or a move-in-ready home is more your style, reach out to Edina Realty. We can connect you with the experts you need to keep moving forward.

Prosperity Home Mortgage is an affiliate of Edina Realty. See Affiliated Business Arrangement Disclosure Statement.