Are You A Frustrated Buyer? Consider A Fixer-Upper Mortgage.

This article was provided to The Associated Press by the personal finance website NerdWallet. 

This is the issue, especially for first-time homebuyers: There aren't enough affordable or entry-level homes available that are move-in ready.

One proposal is to expand the search to fixer-uppers. With a renovation mortgage, you can get one home loan that combines the purchase price with the cost of improvements.

Difficult To Locate An Affordable Home

Low inventory of entry-level homes, whether new or used, is an issue. Most gains in housing inventory have been in upscale homes, according to Realtor.com.

There has been a steep decline in entry-level new home construction: 36 percent of homes built in 2000 had under 1,800 square feet; in 2017, 22 percent did, according to the Harvard Joint Center for Housing Studies.

As for existing homes, resales of homes costing $100,000 to $250,000 were down 1.9 percent in October, 2018, compared with a year earlier, according to the National Association of Realtors. Demand is there, however: Even with the decline, homes in that price range accounted for 40.2 percent of sales.

So, as we have a shortage of affordable homes, it makes sense to consider buying and fixing up homes that are outdated, or simply in need of repair, or both.

There are two major types of renovation loans: The FHA 203(k) loan, insured by the Federal Housing Administration (FHA), and the HomeStyle loan, guaranteed by Fannie Mae. Both cover most home improvements, whether major or minor.

Basically, every kind of repair that can be done to a property, can be done with the matching renovation loan. Hart Pro Realty can assist in selecting a renovation loan lender.

Renovation loans expand mortgage options

Both FHA 203(k) and HomeStyle can be used for both structural and cosmetic renovations.

With both loan types, renovation work may begin immediately after closing.

FHA's 203(k) loan is for primary (owner occupant) residences only. It requires a minimum credit score of 500 with a downpayment of at least 10 percent; a credit score of 580 or higher allows a downpayment of 3.5 percent. These loans can't be used for work that the FHA deems a luxury, such as installing a swimming pool.

There are two types of 203(k) loans: Limited and Standard.

The 203(k) Limited is for renovations costing $35,000 or less that don't require major structural work. The 203(k) Standard is for projects either above $35,000 or involving major structural work.

The 203(k) Standard loan requires a HUD consultant, who helps the homeowner solicit and analyze bids and oversees inspections of the work. Consultants are often contractors, architects or home inspectors. HUD has a tool to search for consultants.

Fannie Mae's HomeStyle loan may be used to buy and fix up a primary residence, second home or investment property. It requires a minimum credit score of 620. Minimum downpayment is 3 percent or 5 percent, depending on whether the home is owner-occupied and the borrower is a first-time homebuyer or has a low to moderate income.

HomeStyle loans have few restrictions on improvements, other than that they "should be permanently affixed to the real property (either dwelling or land)," according to Fannie Mae guidelines. That means HomeStyle may pay for adding a swimming pool.

Be careful of the pitfalls that can create problems either now or in the future

The most common problem is failing to get detailed cost estimates. To prevent cost overruns, make sure estimates are specific about materials, and include costs for inspections, permits and consultant fees (if applicable).

Another pitfall: over-improving the home. If every house on the block has one story and three bedrooms, it's likely a bad idea to add a second story with two more bedrooms. The home will no longer fit in with the neighborhood, and it will be difficult to get an accurate estimate of the home's post-renovation value because of the lack of nearby comparable homes.

Getting started

After finding the house you want, (Hart Pro Realty is here to assist)! Choose a lender, decide on a loan type and hire a HUD consultant. Then, with the consultant's guidance, get estimates from contractors. Your lender will need copies of the estimates. (In some cases, lenders may offer a defined list of acceptable contractors).

The renovation work may begin immediately after you complete the loan closing.

When the renovations are complete, you'll have the home as you want it – and, likely a lot sooner than you might have thought possible.

Contact Hart Pro Realty for more information.