One might imagine that finding financial help for first time homeowners with fixer uppers would be an incredibly difficult endeavor. Thankfully, there are many loans and programs available to home buyers interested in fixer-uppers. Most allow buyers to bundle their mortgage payments with a rehabilitation loan at a fixed relatively low interest rate. Few of these loans require high credit scores and some even offer down payment and closing cost assistance to first-time buyers. If you thought homeownership was out of reach, follow below to learn about the many loan options available to first-time buyers. From FHA 203(k) Rehab Loans to HomeStyle Loans, there are so many options to choose from when buying a fixer-upper in 2022.
8 Financing Options for First-Time Home Buyers Interested in Fixer-Uppers
#1 Fannie Mae HomeStyle Renovation Loan
First on our list of home loans designed for first-time homeowners with fixer-uppers is the Fannie Mae HomeStyle Renovation Loan. We recently outlined Fannie Mae loans in our post “Choosing the Right Mortgage Loan as a First-Time Home Buyer.” Both Fannie Mae HomeReady and Freddie Mac Home Possible loans were created to help lower income Americans access homeownership. We mentioned the HomePath Ready Buyer Program in our post too.
In “Your Guide To The Fannie Mae HomeStyle Renovation Loan” for Forbes, Amy Fontinelle and Mike Cetera explain how this specific loan helps buyers. Fontinelle and Cetera write that first and foremost, the HomeStyle renovation mortgage from Fannie Mae is “an all-in-one purchase loan and home improvement loan.” They note that unlike other loans, HomeStyle is “super flexible when it comes to the repairs and upgrades you can finance.”
HomeStyle loans allow the borrower to perform both cosmetic updates and gut renovations. As with an FHA 203(k) rehab loan, you can put funds from a HomeStyle loan towards temporary housing. According to Cetera and Fontinelle, homeowners “can include up to six months’ worth of principal, interest, taxes and insurance” in their financing.
Key Features That Set the HomeStyle Loan Apart
The Fannie Mae HomeStyle renovation loan differs from the FHA 203(k) Rehab loan in two key ways. First, it can be used to finance the purchase of and renovation costs related to any type of fixer-upper. Unlike the 203(k) loan, home buyers can apply funds from a HomeStyle loan to an investment property. They can also be applied to a vacation home or a primary residence.
Second, homeowners can use the funds from their HomeStyle loan to “build an accessory dwelling unit…on the property.” This ADU can function as a source of passive rental income or serve as a secondary home for family and friends. Borrowers can also use this type of loan to finance construction of “luxury features” that are not attached to the main home. These can include anything from “an in-ground pool” to an “outdoor kitchen.”
One of the few things you cannot do with a HomeStyle loan is tear down the existing house and build a brand-new one. Fannie Mae also requires that homeowners hire an approved contractor to conduct all repairs and renovations. As with a construction loan, the lender will manage contractor payments — issuing them in installments.
This is also how FHA loans work — meaning that your ability to DIY renovations is very limited with funding from both. Unlike the FHA loan, buyers will need 620+ credit scores to qualify for most Fannie Mae mortgages. As mentioned above, the minimum credit score for many government insured mortgages is only 580 points.
#2 Freddie Mac CHOICERenovation Loan
The CHOICERenovation Loan from Freddie Mac is one of the newest resources for fixer upper buying homeowners. This loan did not hit the residential real estate market until 2019 – only three years ago! According to Amy Fontinelle and Mike Cetera in an article for Forbes, Freddie Mac launched the CHOICERenovation loan with a specific goal in mind. The corporation launched the CHOICERenovation loan “to help improve the nation’s aging housing stock and create more affordable housing options.” Like the HomeStyle loan, this loan allows buyers to bundle their mortgage with a rehab loan.
The CHOICERenovation loan has since become incredibly popular amongst California home buyers and those in the Southeast US. This is because CHOICEReno can be used to “harden homes against natural disasters…or to repair a disaster-damaged home.”
Key Features of the CHOICERenovation Loan
Unlike other loans on this list, the CHOICERenovation loan can be bundled “with Freddie Mac’s Home Possible, HomeOne and super conforming mortgages.” For homeowners, this means that you could “put just 3% down through the Home Possible program while also borrowing enough to finance renovations.” CHOICERenovation loans appeal to many different types of homeowners buying a fixer upper house and are not limited solely to first-time homeowners.
According to Fontinelle and Cetera, “you can use a CHOICERenovation loan to finance a home purchase.” You can also do “a no-cash-out refinance on a home you already own.” This makes CHOICERenovation loans popular amongst both brand new Millennial homeowners and seniors hoping to continue aging in their homes. Another popular element of the CHOICERenovation is that homeowners can pick their contractors and designers without input from the lender or insurer. Renovations are subject to inspections, however.
Like Fannie Mae HomeStyle loans, CHOICERenovation loans can be used for both investment properties and primary residences. There are limits to how many units are included in each property. As such, these types of loans do not apply to most multifamily investments properties. Technically, there is no minimum credit score requirement for a CHOICERenovation loan. However, Freddie Mac does prioritize those with a 660 score or higher. Loan limits are between $500k and just under $1.5M, depending on where you live.
#3 Freddie Mac CHOICEReno eXPress Loan
The Freddie Mac CHOICEReno eXPress loan is a bit different from the standard Freddie Mac CHOICERenovation loan. According to a press release from Freddie Mac on 05 August 2021, the CHOICEReno eXPress loan is not intended for structural renovations. The press release notes that this loan is designed as “a streamlined, affordable financing option” that allows buyers “to make cosmetic renovations.”
These renovations include “replacing windows and doors, roof repairs, minor remodeling and interior or exterior painting.” This new version of the CHOICEReno loan can be used to finance “renovations of up to 10 percent of the home’s as-completed value.” In rural areas where urban development is lagging, this extends to as much as 15% of the home’s post-renovation value. Qualifications for the eXPress loan are similar to those of the original CHOICEReno loan. Oftentimes, loans only allow for up to five percent of the home’s post-reno value.
#4 Limited or Standard FHA HUD 203(k) Rehab Loan
Perhaps the best known on this list, the HUD 203(k) Rehab loan also bundles a homeowner’s mortgage with the cost of renovations. Unlike the Fannie Mae and Freddie Mac loans, HUD 203(k) loans are insured by the Federal Housing Administration. Thus, they are subject to a wider set of restrictions and requirements. However, they require lower down payments and minimum credit scores. There are two options available to first-time home buyers seeking this type of loan: the streamlined or limited 203(k) loan and the standard 203(k) loan. The former allows you to add as much as $35k in repairs to your mortgage while the latter is intended for bigger jobs.
Standard loans allow buyers to add much more to their mortgage, but this larger loan comes with more scrutiny. With a standard 203(k) loan, homeowners must open their property to HUD-certified appraisers, inspectors and contractors. These parties ensure all federal government standards are met. 203(k) loans are usually limited solely to home buyers who plan to claim their new property as their primary residence.
Key Features of the FHA 203(k) Rehab Loan
As Michele Lerner notes in an article for The Washington Post, “‘FHA loans are attractive for first-time buyers because they’re easier to qualify for.’” Buyers can qualify for an FHA loan with a FICO score as low as 580 points. Plus, they only need a down payment of 3.5% and can have a relatively high debt-to-income ratio. Buyers who put down 10% or more can have a credit score as low as 500 points. Like other rehab loans, homeowners can use funds from their 203(k) loan in myriad ways.
Michele Lerner elaborates in her article “A guide to finance options for buying and renovating a fixer-upper” for The Washington Post. Lerner writes that the flexibility afforded to home buyers varies based on whether the buyer chooses a limited or standard loan. Quoting loan specialist Amy Marie Dirazonian, Lerner writes that “‘“there’s not much you can’t do under the FHA 203(k) standard program.’” For instance, homeowners can use funds from a standard loan to “‘convert a one-level property to a two-story.'” They can also use funds to “‘do a full remodel of the interior, build a garage or convert it into an in-law unit.’” With a limited loan, you cannot conduct any structural repairs.
Unlike the Fannie Mae and Freddie Mac loans, adding luxury elements is not permitted with either the standard or limited rehabilitation loan. Repairing those items is allowed. FHA HUD 203(k) rehab loans also provide buyers with funds for temporary housing while renovations are underway. Typically, temporary housing funds are allotted for a maximum of six months. This period makes sense given the FHA requires all renovations of a fixer upper home be completed within half a year after purchase.
HUD FHA Insured Energy Efficient Mortgage Loan
Another government insured loan designed to help homeowners with fixer-uppers is the energy efficient mortgage loan from HUD. According to HUD, the EEM or FHA’s Energy Efficient Mortgage program is designed to help homeowners save on utility bills. The loan program does this by enabling homeowners “to finance energy efficient improvements with their FHA-insured mortgage.” An EEM loan can be bundled with an existing 203(k) rehab loan or with FHA insured mortgage payments.
HUD notes that “the maximum amount that can be added to the borrower’s regular FHA loan amount” is 5% of the home’s adjusted value. Alternatively, the maximum FHA loan limit could be “115% of the median area price” of a single family home. Lastly, it could be “150% of the national conforming mortgage limit.” Homeowners can find out how much they could borrow with an energy efficiency mortgage loan by using the FHA’s EEM Calculator.
#5 VA Renovation Loan
Designed for veterans and military service members, VA renovation loans allow home buyers to bundle their VA mortgage with a rehab loan. A single monthly payment covers both the mortgage and home improvements. Molly Grace explains how VA renovation loans work in her article “VA Renovation Loan: The Home Improvement Loan For Veterans” for Rocket Mortgage. Grace writes that VA renovation loans help “borrowers purchase a home in need of repairs or upgrades without having to get a separate loan.” Instead, all necessary “repair costs and purchase price are rolled into a single loan with one monthly payment.” Unlike some other rehab loans on this list, you may use a VA renovation loan to “refinance an existing loan.” You can also use them to finance a new fixer upper project.
Key Features of the VA Renovation Loan Program
Unlike other loans, Veterans Affairs renovation loans let borrowers put absolutely no money down. These loans might also cover some closing costs. Like other government insured renovation loans, those who apply for a VA renovation loan must work with an approved contractor and design-build team. There is no set minimum credit score for VA renovation loans, but there are some borrower requirements. Most VA renovation lenders prefer a credit score above 620 and require verifiable income as well as a low debt-to-income ratio.
#6 USDA Rural Housing Renovation Loan
In “Choosing the Right Mortgage Loan as a First-Time Home Buyer,” we mention USDA mortgage loans as viable options for rural home buyers. USDA home loans were originally intended for lower-income buyers in rural parts of the US. Today, USDA loans have the cheapest private mortgage insurance rates of any lender, making them attractive to first-time buyers.
Key Features of the USDA Renovation Loan Program
The resource “Purchase with Rehabilitation and Repair Loans” from the USDA Rural Development outlines the benefits and requirements of USDA renovation loans. According to the USDA, home buyers must have an annual family income that is less than half of the area’s median income. USDA renovation loans only apply to primary residences and can be used to make properties more accessible to the elderly or disabled.
They can also be used to finance structural and functional home improvements, but not most cosmetic updates. For example, funds can be used to repair electrical and plumbing, to remodel kitchens and to update septic systems. There is no maximum loan limit when buying a fixer upper with a USDA loan. However, only up to $20k of the loan amount qualifies for 1% interest financing. Contact your real estate agent or mortgage broker for more information.
#7 Fix and Flip Loan
Fix and flip loans are rarely approved for first-time home buyers. However, you might still be able to fund your project with one of these short-term loans. HUD defines a first-time home buyer as someone has not claimed a home they own as a primary residence within the last three years. Under this definition, first-time buyers could technically qualify for a fix and flip loan when buying a fixer upper. For those unfamiliar with fix and flip loans, Amy Fontinelle explains in “How to Get a Loan to Flip a House” for Investopedia. Fontinelle writes that most fix and flip loans are “hard money loans.”
Hard money loans are short-term loans – usually a year or less – with high interest rates. These interest rates far exceeding the current market rate for a conventional mortgage. The amount a hard moneylender will offer home buyers is usually based on “the home’s after-repaired value” or ARV. Lenders usually allow you to borrow between 50 and 80% of the ARV, but rarely 100%.
Interest rates for hard money loans usually hover between 12% and 18% “plus two to five points.” Each of these “points” equals about 1% of the loan. These are similar to the discount points applied at closing when buying a home with a traditional mortgage. With a hard money loan, “you may not have to pay points until the home sells” instead of paying at closing.
Barriers to entry are lower for hard money loans. Lenders rarely care much about the borrower’s credit score or debt-to-income ratio. This is because “‘should the flipper default, the hard moneylender can foreclose, take ownership of the house, and sell it profitably on their own.’” Fix and flip hard money loans are the riskiest and least advisable type of rehab loan on this list.
#8 State Funded Closing Cost Assistance and Down Payment Assistance Programs
Last on our list are state funded closing cost assistance and down payment assistance programs. As mentioned above, both USDA and VA renovation loans help buyers pay for closing costs and occasionally offer a down payment credit. However, few federal and conventional loans offer down payment assistance. Alternatively, most states across the have established down payment assistance programs for first-time home buyers. In most cases, only first-time buyers who intend to claim their new house as a primary residence can qualify for down payment assistance. Find options for California, New Hampshire and Massachusetts home buyers below:
- MyHome Assistance Program
- CalHFA Government Loans
- CalHFA Conventional Loans
- New Hampshire Homebuyer Tax Credit
- Home Flex Plus Program
- Home Preferred Plus Program
- MassHousing Loans
- Workforce Advantage
- Operation Welcome Home
- Neighborhood Development
Learn more about down payment assistance offered to Massachusetts home buyers in our post “7 First-time home buyer programs for the Boston area.”