Financing a Fixer Upper
Many homebuyers like the challenge of turning a shabby house into the home of their dreams. Renovating a home, however, doesn’t come cheap and most homeowners need additional funds. Below are answers to some of the most common questions asked when considering purchasing a fixer upper.
How does the appraisal work for the home I’m purchasing?
Typically, this type of property purchase is considered a construction loan. Appraisals are done on an “as will be” basis, meaning that the appraised value is done as if all of the proposed improvements were already done. Look for a lender who will, under the right circumstances, lend up to 80 percent of the total appraised value. In some cases, the value comes in high enough that the borrower may need very little or no money down.
What bids and estimates do I need?
Lenders require bids, or estimates, when you apply for your loan. Some require multiple bids for each piece of the overall project. Not all lenders require bids for each piece.
Can I be my own general contractor?
If you have the skills, doing all or part of the work yourself can save you money. You still need to provide bids for parts of the project you will do as if a builder or vendor were doing them. Some lenders require this in case you are not able to finish the portion you planned to do yourself due to an unforeseen event. Someone must finish the project, which could mean paying a contractor to finish the work. Enough funds need to be available, should this happen. Additionally, most lenders add 10 percent of the total bid amount to the available construction funds. This helps cover the cost of overruns that tend to occur with these types of projects.
How do I pay interest on a loan I’m using to renovate a home?
You have two options. A) You can pay interest each month on the actual principal balance as you use the funds during construction. B) Lock in a rate on a portfolio loan. If you choose to lock in your rate, Compeer Financial fully disburses the loan with the construction portion of the funds set aside in an escrow account earning interest. You will pay a set amount each month that includes both principal and interest.
What happens if I have unused funds when my renovation is complete?
When construction and a final inspection are complete, you can typically have any unused funds applied back to your loan or use them for something else.
What happens to my loan after construction is complete?
If the loan is going to remain as a portfolio/in-house loan at Compeer Financial, we will lock the rate when construction is complete - if you have not already locked. This requires no additional closing or fees. You begin making principal and interest payments at that time. You can also choose to refinance your loan if the property is eligible for a Freddie Mac, or secondary market loan. Freddie Mac will not accept the property until all construction is complete.
How much time do I have to complete my renovation?
The typical construction period for a purchase with renovation is 12 months.
Will my lender monitor my progress throughout the project?
Compeer Financial has specific team members who work with the construction and rehab loans to help clients stay on track with the budget and avoid construction liens, protecting both you and Compeer Financial.
To learn more about Compeer Financial's home mortgage solutions for purchasing a home in need of rehab or improving the home you already live in, contact a home mortgage specialist today.