Buying a home to renovate is a great way to break into the market.

Nearly 30% of houses were bought with cash in 2021. Although the market has cooled off since then, it can still be hard to compete. One way to beat the crowds of other homebuyers is to buy a fixer-upper. Sure, it won’t be perfect the day you move in, but it may be easier to afford.  And you get to put your own spin on the property over time and truly make it your own. If you find a great house that needs work right away, there’s a loan for that. Renovation loans allow you to buy and fix up a house with a single, low- or no-down payment loan.

Is buying a fixer-upper as your first home really a smart idea? The short answer is yes. Buying a home to fix as your first one can expand your buying options. First, you’re not just looking at the turnkey homes everyone else is bidding on. Secondly, you may be able to purchase a home for less than you expected to spend.  And third, you may be able to negotiate on price or terms with the seller. 

Obviously buying this kind of property isn’t the right call for everyone. If you don’t have the time or mental bandwidth to think about renovations, contractors, and DIY projects, a fixer-upper is not your best option. But remember that the term “fixer-upper” is a broad one. It can refer to homes that need complete overhauls of the kitchen and bathroom plus a few walls that need to come down. On the other hand, it could refer to a house that is totally move-in ready but that has some outdated fixtures and needs some fresh paint. Don’t be afraid to consider a house that’s a little dated but is otherwise in good condition and in a community where you’d like to live.

Pros and cons of buying a fixer-upper as your first home — 

Pros. 1] There is less competition. 2] You can personalize your home from the start. 3] The purchase price will likely be lower. 4] You may find a good deal in a desirable neighborhood.

Cons. 1] Renovation projects can be time-consuming. 2] Finding contractors may be challenging due to the demand. 3] You may not be able to move in immediately if you’re doing major renovations. 4] Construction costs can add up quickly. 

Using renovation loans to buy a fixer-upper. Here are some options that may be available to you — 

Renovation loans can be a great option for buying a fixer-upper as your first home because they allow you to bundle the purchase price plus renovation costs into a single mortgage. That means one monthly payment; and most renovation loan options have low- or no-down-payment requirements, making them more accessible.

Fannie Mae Homestyle Renovation Loan. You can use this conventional loan to pay for your home and any cosmetic, structural, and luxury upgrades. Any renovations done by your licensed contractor should be completed within six months of closing. You can borrow up to your pre-approved amount, and the required down payment is 3%.

Freddie Mac CHOICERenovation® Loan. This Conventional loan requires as little as 3% down for first-time homebuyers purchasing a primary residence. You can use this loan to pay for your home and any renovations, including cosmetic, structural, and luxury upgrades.

FHA 203k Loan. The Federal Housing Administration (FHA) backs two types of renovation loans: the FHA 203K Standard and FHA 203K Limited. Both have a low down-payment option that only requires 3.5% down. You can borrow up to a pre-approved amount with the Standard loan. You may use it to pay for your home and any cosmetic or structural changes. You can borrow up to a pre-approved amount with the Limited loan, with conditions. You can use up to $35,000 on cosmetic renovations, but you may not use the Limited Loan for structural repairs or additions.

VA Renovation Loan. If you are a veteran, active-duty service member, or an eligible surviving spouse, you may qualify for a nothing-down VA renovation loan. You can borrow up to $35,000 to make cosmetic renovations to a property. A VA-approved contractor must do the renovations, but there is a long list of these contractors.

USDA Renovation Loans. If you qualify for a USDA renovation loan, you can finance your home purchase and renovations with no down payment. There are two types of USDA renovation loans: USDA Standard and USDA Limited. The USDA Limited loan allows for $35,000 of your pre-approved amount to be used on cosmetic changes.  You can borrow up to a pre-approved amount with the USDA Standard loan with no limit on how much of the loan is used for renovation costs, either cosmetic or structural modifications. If you are a licensed contractor, you should note that you may not do your own renovations with a USDA renovation loan.

Buying a fixer-upper as your first home FAQs —

1. How much do you have to put down on a fixer-upper? Fixer-uppers require between 0%-20% down depending on the type of loan you choose and the type of property you purchase. A conventional loan will require more cash down than the above loans.

2. Is buying a fixer-upper cheaper? While few houses are cheap these days, buying a fixer-upper can be cheaper than buying a turnkey property that is newly renovated.

3. How do people afford the renovations on a fixer-upper? Some people use a renovation loan to cover the costs of fixing up their houses. This allows them to buy the home and finance repairs with one mortgage. Others may use a credit card, personal loan, home equity loan, or home equity line of credit. Some may use personal savings to pay for renovation costs.

The bottom line on buying a fixer-upper as your first home

1. One of the most important things you can do when buying a fixer-upper as your first home is to set realistic expectations. Go into the purchase knowing the house won’t be perfect right away – maybe not even for a while. Ask yourself if you’re okay with working on the house over an extended period or having part of the property be a construction zone when you first move in.

2. Fixer-uppers come with quirks. If you plan to renovate yourself over several years, expect issues to crop up. That means keeping a savings account just for home repairs.

3. Buying your first home to renovate isn’t the easiest route to take. But this strategy is rewarding and can enable you to buy a home sooner.

Edited and courtesy of Fairway

We’ve done several fix-up properties, and a major remodel of our own home, so we’ve dealt with architects, engineers, tradespersons, inspectors, and cities. We know the ropes. We can help you decide if buying a fixer for your home, or fixing and sell are for you. Call or text me at 626-825-5599.

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