FHA Loan for a Fixer Upper
There are many first time home buyers who would love to buy a home but the prices are just a bit out of reach. One way to get into a new home at a more reasonable price is to buy a fixer upper at below market value and then bring it up to your standards and make it yours.
You can get an FHA loan for a fixer upper to either fix items that are in disrepair, it to customize the home to meet your standards.
Can you buy a fixer upper with an FHA loan?
You can buy a fixer upper with an FHA loan if that home will be your primary residence after the work is completed. The loan amount must be within the FHA loan limits for your county and the home must pass the FHA inspection upon completion.
How to Buy a Fixer Upper with an FHA Loan
It is great to have aspirations to buy a fixer upper at a reduced cost and then put the work in to bring the home up to your standards or taste. However, if you would like to use an FHA loan to accomplish this, there are some things you need to know and guidelines you must follow.
For a traditional FHA loan (the FHA 203b), the home must be in a livable and safe condition prior to closing. Therefore, if the home is a fixer upper because it is outdated, then that is fine. You can buy the home and then rehab it using your own money and on your own schedule. However, if the home cannot pass inspection, then you must apply for the FHA 203k rehab loan which we will talk about later.
Steps to buying a fixer upper with an FHA loan
These are some of the basic steps to follow when buying a fixer upper with an FHA loan.
Step 1: Get pre-approved by a lender that offers FHA 203k rehab loans. If you cannot get approved for the mortgage amount needed, then you will need to adjust your budget. Speaking with a lender up front to get pre-approved is critical. It is also important to know whether the lender is familiar with and can help you to secure an FHA 203k rehab loan. To get pre-approved with such a lender, please complete this short form.
Step 2: Once you have your pre-approval, find a reliable contractor who can help with the rehab process. Finding the contractor may take more time than finding the lender. This contractor must be willing to visit the home you are interested in prior to making an offer. You will need an estimate of what the rehab costs will be.
Step 3: Check to see if there are any code restrictions or requirements to make the changes that you want to make to the home. You should also understand what upgrades are allowed per the FHA guidelines when being financed by an FHA loan. For example, you are permitted to fix an existing pool with the loan, but you cannot build a new pool.
Step 4: Make sure the total purchase plus rehab budget is within your pre-approval amount. Have another discussion with your lender to make sure you are both on the same page. Then, make your offer to purchase the home.
Step 5: Search for a home inspector and also an FHA 203k consultant who will help navigate the entire process for you.
Once you have completed these 5 steps, the rest of the process is the same as what you would expect when purchasing a home that does not need rehab. There will be the usual application and underwriting process. You may find the underwriter will ask for more detail related to the rehabilitation so be patient with those requests.
What Industry Experts are Saying
Eric Jeanette – “Buying a fixer upper with an FHA loan is a great way to purchase a home at a reduced price and bring it up to your standards.”
Kyle Hiscock – “The contractor can look over the home at time of purchase, get details about the proposed repairs or additions, and provide a full cost markup.”
Buying a Fixer Upper with an FHA 203k Loan
The FHA 203k rehab loan allows you to purchase the home and also rehabilitate or upgrade the home all with just one loan. The qualifications for getting an approval is the same when it comes to your income, credit, and assets.
There is more work required by you as the buyer if you are applying for this unique fixer upper loan program. You are responsible for finding the contractor and making sure the work needed will fit within the budget and also your loan approval. This is why many home buyers decide to abandon the idea of buying a fixer upper.
If you learn how this mortgage works and use it to your advantage, you can potentially flip homes over time while living in them for at least a year.
The FHA 203k rehab loan will allow for you to do just about anything within reason and pay for it with the loan. Read [FHA 203k loan rules] to learn more about how that loan program works.
FHA Loan for a Multi Family Fixer Upper
If you would like to use an FHA loan to buy a fixer upper that is a multi family home, you can really increase the value and build wealth at the same time.
Buying a single family home to live in is very different than buying a multi family home that you can also rent to earn an income. The most important thing here is you must occupy one of the units in the home as your primary residence for the first year.
When buying a multi family fixer upper home, you are looking for a property where the rental units have not been updated or are in need of repair. This is a signal that the rent for these units may be set at below market value due to the need for a rehab. This also presents an opportunity for you to raise the rents after doing some rehab to each of the units.
Prior to purchasing a multi family fixer upper, understand what leases are in place and when they expire. You should also find out what the eviction laws are in your community because you may have a hard time getting a tenant to move out so you can update the unit.
By fixing up a multi family home, you can earn more money on a monthly basis than what the additional mortgage payment would be to cover the rehab costs. Then, you are adding immediate value to the property which you can live in for a year and then do it all over again with another property.
Can you add repair costs to an FHA loan?
You can add repair costs to an FHA loan and those costs can be rolled into the loan used to purchase the property. The home must be your primary residence upon making the purchase unless time is needed to make the home habitable.
What is the FHA renovation limit?
The FHA renovation limit is going to be 110% of the home’s future value. For example, if you purchase a home for $200k and after the renovation it may be worth $250k, your total loan amount cannot exceed $275k.
Keep in mind that if you reach the FHA renovation limit, you are going to initially be under water on your mortgage. This means if you sell the home right away and before it increases in value, you could owe money to the bank when you sell.