Investing in a home that needs work might seem like a great way to save money on your first home, but buying a fixer-upper home as a first-time buyer is not always the right choice for some people. Not everyone is as motivated to transform and renovate the home into their dream home. If you are considering an older home or one that needs some TLC, it is worth your time to consider the following questions:
What types of work does the home need?
If the shutters are falling off and the roof is sagging, the home could have more problems than the money you’d save. It is highly recommended to get a house inspection performed by a qualified home inspector so you know exactly what needs to be done. Then you can decide whether you even want to make an offer on the home or move on and look at other homes.
Keep in mind, just because a home is older, it does not necessarily mean it needs to be renovated. For instance, a home built in the 1940s or 1950s could have vintage cabinets and countertops in great shape or one of those old-time wood-burning stoves.
Some people might love the retro feel of the home while others would view the home and would see it as being outdated and in need of work. This is also why some older homes sell at a premium and others as fixer-uppers.
What type of offer should I make on a fixer-upper home?
When making an offer for a fixer-upper, you will want to:
- Compare costs of similar homes in the area.
- Compare recent sales prices of similar homes in decent shape.
- Look at the current appraised value of the home.
- Have an estimate for the work that needs to be done.
Once you have these figures, take the average sales price of homes in decent shape and subtract the estimated costs of work to be done. Compare this figure to the current appraised value of the home. Both should be fairly close because the sales price should have deducted out the costs of repairs and renovations. Make an initial offer price about ten percent less than the lower of the two amounts.
What types of financing are available for fixer-uppers?
You have different loan programs to choose from based on your financial needs. Part of the problem first-time buyers run into when considering fixer-uppers is not having the cash needed to make the repairs.
Fortunately, there are a few different loan programs you could pursue that would allow you to apply for a mortgage to include the purchase price plus repairs for as much as 110% of the home’s current value.
One such program is through the FHA and part of the FHA loans programs. This program is called an FHA 203(K) loan. There are two different sub programs available through the 203(K) program. One is for major repairs that will cost a minimum of $5,000 while the other is for minor repairs and does not have a minimum limit requirement.
FHA loans are a good option for first-time home buyers who want to purchase a fixer-upper and need the extra money to make repairs. Plus, many people qualify for these programs with lower credit scores and will still have a low down payment.
On the other hand, you could also consider conventional financing if you already have the money to cover the costs of the repairs and renovations you want to make. With conventional financing, you are only borrowing the money to purchase the home and nothing extra for repairs.
Is a fixer-upper really for me?
Some people make the mistake of buying a fixer-upper and then realize it was more work than they originally envisioned. Now they are stuck with the home because, if the repairs are not made, it will be difficult to sell the home and get the money needed to pay off their mortgage.
Granted, fixer-uppers can be wonderful investments and starter homes, so long as you understand there will be work to be done. In some cases, not all fixer-uppers are move-in ready, so you will need to make other living arrangements until the home is livable. Carefully weigh your options to decide if purchasing a fixer-upper is right for you.
Whether you are looking for financing to buy a fixer-upper or a move-in-ready home, remember A and N Mortgage is here to help. Our mortgage brokers are knowledgeable and can help you find the right type of financing and loan program to best suit your needs and budget. Contact us at (773) 305-LOAN (773-305-5626) today!