May 18, 2021

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Mortgage News

The Easiest Way to Afford the Home of Your Dreams

Buying a home that requires a little TLC saves you money and allows you to put your stamp on a home.

Around September 2020 – six months after social distancing, quarantine, and intense isolation – I decided to sell our home and move across the state to be close to the family. At first the idea was exciting, and I studied real estate listings online like an archaeologist flipping through ancient manuscripts. I was obsessed with learning all about living in this region.

For a while I forgot to be rational. As much as homes in our region were valued, homes on the other side of the state were more valued. To buy a home with characteristics similar to ours, we must count on an additional $ 100,000 to $ 150,000. And so began the search for ways to buy a home that we like as much as our current home without spending an arm and a leg.

Traditional purchase

The prices for homes in the area we are most interested in are outrageous. Even after a large down payment and extremely low interest rate, I would always suspect that we paid too much for the house, largely because I spent months “tracking” the neighborhood and watching average prices escalate. I didn’t want this to be us, so I looked deeper into alternatives, like buying one Fixer upper at an affordable price and with the upgrades that make it feel right at home. Here are some of the options I came across when financing a fixer-upper in our price range.

Fannie Mae HomeStyle® home renovation loan

Fannie Mae is kind of conventional loan supported by the US government. With the HomeStyle® renovation loan, a buyer can purchase a Fixer upper material with only 3% discount. Upgrades or renovations that are permanently attached to the property are permitted. Buyers must work with a licensed contractor and have a credit score of 620 or higher. While it is possible to use a Fannie Mae HomeStyle® renovation loan to upgrade a rental property, it is no longer as easy as it used to be, and Fannie Mae carefully controls the number of investors it approves.

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FHA 203 (k) loan

FHA loan are available through mortgage lenders across the country but are insured by the US Department of Housing and Urban Development. The 203 (k) loans come in two flavors: limited and standard. If you’re doing repairs and upgrades under $ 35,000, the limited loan (sometimes referred to as “streamlined”) is your best bet. If renovations are expected to cost $ 35,000 or more, you’ll need a Standard 203 (k). You must work with an FHA approved contractor and meet the following minimum qualifications:

  • Credit score of 500 (with a 10% deposit)
  • Credit Score of 580 (with less than 10% deposit)
  • Minimum deposit of 3.5%

VA home renovation loan

My husband and I are not eligible for a VA loan. However, if you do, take a closer look at the VA home renovation loan. Like the Fannie Mae loan and FHA 203 (k), a VA home renovation loan lets you buy an imperfect property and make it your own. You will typically need a minimum loan value of 620, but this will depend on the lender. The amount funded depends on how much the property is expected to be worth after all repairs and upgrades are complete. A VA approved contractor will walk you through estimates and quotes, and a VA appraiser will predict the final value. The only fly in the ointment is that you may need to shop VA lender to find one that offers the home renovation loan.

Home equity loan

Because of the extra work involved, the interest rate on a home renovation loan is typically 0.5% to 1% higher than a traditional loan. For example if a traditional 30 year old Mortgage rates If you are 3%, you can expect to pay 3.5% to 4% for a home renovation loan.

You have several options for managing these additional costs. You can use a home renovation loan to renovate your home and then pay the fees necessary to refinance the mortgage at a lower interest rate. Or, if you have enough equity on the house to have equity, you can borrow it against that equity to renovate.

Here is an example of how a traditional loan might work:

  • Home price: $ 300,000
  • Deposit: 20% ($ 60,000)
  • Traditional mortgage: $ 240,000
  • Interest: 3%
  • Repayment period: 30 years
  • Equity: $ 60,000
  • Total interest paid: $ 124,266

Now let’s say you are ready to get a home equity loan. With excellent credit, a lender will loan you up to 85% of that equity. This could look like this:

  • Home Equity: $ 51,000 ($ 60,000 x 0.85 = $ 51,000)
  • Interest: 4.5%
  • Repayment period: ten years
  • Total interest paid: Interest of $ 12,427

The traditional one mortgage plus the home loan brings you too $ 136,693 with interest payments. Let’s say you took out a home renovation loan instead. This is how it could collapse:

  • Home price: $ 300,000
  • Deposit: 20% ($ 60,000)
  • Renovation mortgage: $ 240,000
  • Interest: 4%
  • Repayment period: 30 years
  • Total Interest Paid: $ 172,487

If you take out a traditional mortgage at a lower rate and repay the home loan in 10 years, you will save $ 35,794 in interest payments (compared to the home renovation loan). That’s money you can or can save Invest with a stock broker.

As for my family, we’ve taken a step back from selling our home. The market is also hot now. To avoid bidding wars, we have chosen to put it on hold and let the current onslaught of homebuyers drive prices up as high as the market can take. When things cool down (and they will) we have different home buying options in our back pocket to create that new perfect space.