HomeStyle Renovation and 203(k) Mortgages Make "Fixer Uppers" Fixable

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The HomeStyle loan allows you to make any renovations and upgrades you choose, but the rules are different for a 203(k). The minimum amount you can borrow for renovations with the HUD loan is $5,000 more than the price of the home. You can borrow more, but at least $5,000 must be used for repairs and changes that affect the safety and health of the people living there. So if you wanted extra money to carpet the house or paint it inside and out, you couldn't do so unless you also had $5,000 worth of health and safety problems to fix, such as plumbing, electrical work, a new roof, and so on. You can do cosmetic repairs, but only if there are at least $5,000, or more, worth of necessary repairs.

As with the HomeStyle loan, the total amount you can borrow with a HUD 203(k) loan depends upon several factors. You can borrow the lesser of the following two amounts: the price of the property plus the cost of the renovations, or 110 percent of the expected market value of the house once the work is done. To find a lender in your area who handles 203(k) mortgages, call HUD's Consumer Hotline at 1-800-767-4483.

Buying a "fixer-upper" is more complicated than buying a home in "move-in" condition. You have to figure out what the home is worth as it stands, what it will cost to complete the upgrades, and what it will be worth once the repairs have been made. One of the real problems with a "fixer-upper" is that unless you are an expert, you might not know the depth of the problems. Is the floor uneven because of a couple of warped floorboards? Or will all the sub-flooring have to be ripped out and replaced? Can replacing a faucet washer cure the problem in the kitchen or will it require replacing the entire faucet along with the drywall, molding, and the kitchen sink?

Then there's the question of who will do the work? How long will it take? And will you be living in the house while the work is being done? This is why getting a renovation loan takes more time than getting a conventional one. The house has to be inspected, and you need to submit to the lender bids from the contractors who will do the actual work.

With either a conventional or a government-backed loan, the renovation money goes into an escrow account to pay for the work as it is completed. The home is inspected before payments are made. The lender wants to make sure that the money is going to repair the house and increase its value. In most cases, you can do some of the work yourself, if you are qualified—and that means either the work is simple, such as painting, or you have the required licenses or certificates. When you do the work yourself, the loan can be used to pay for the materials, but not your labor. It's your house. You should be willing to work on it yourself for free. After all, you get the benefit of its increased value. If you do hire outside contractors, their costs factor into the equation because they will be paid for their time.

The single most important aspect of a renovation mortgage is that it is only partially based on what the house is worth now. It is also based on what the house will be worth when the renovations are complete. That's why figuring out how much you can borrow is complicated, especially since the lender has to accept your figures. You must determine what the house will be worth when it is fixed up, and what the house costs plus the costs of renovations. With a HomeStyle loan, you can borrow up to 95 percent of the lesser amount. This means you will have to come up with a 5 percent down payment. You can also get that loan as a 15- or 30-year fixed rate mortgage, or as an adjustable-rate mortgage.

Buying a "fixer upper" or "handyman's special" can be scary. But at least with a HomeStyle or 203(k) loan, you can get the financing to do the job right.