Can You Buy a Fixer-Upper With a Conventional Loan?

It is possible to acquire a fixer-upper property using a conventional loan. These specialized programs combine the costs of purchasing a home and funding its necessary renovations into a single loan. This integrated approach simplifies transforming a distressed property into a dream home.

Conventional Loan Programs for Renovations

Two prominent conventional loan programs facilitate the purchase and renovation of properties: the Fannie Mae HomeStyle Renovation Loan and the Freddie Mac CHOICERenovation Loan. Both integrate renovation costs directly into the primary mortgage, simplifying the financing process.

The Fannie Mae HomeStyle Renovation Loan allows for a wide range of property improvements, from minor cosmetic updates to significant structural repairs or additions. This program is versatile, accommodating various property types including single-family homes, condominiums, and planned unit development (PUD) properties. The renovation work must be permanently affixed to the property and add value.

The Freddie Mac CHOICERenovation Loan also supports a broad scope of renovation projects, including those that enhance energy efficiency or improve accessibility. It can be used for similar property types as HomeStyle, such as one-to-four unit primary residences, second homes, and investment properties. For both programs, the total loan amount is determined by the property’s anticipated value after renovations, known as the After-Renovation Value (ARV). This allows borrowers to finance more than just the current purchase price.

These programs offer a streamlined approach by combining purchase and renovation funds, avoiding the complexities of managing multiple loans. Integrating costs into one mortgage means a single monthly payment, which is more manageable.

Qualifying for a Conventional Renovation Loan

Securing a conventional renovation loan involves meeting specific borrower and property qualifications, alongside preparing a detailed renovation plan. Lenders examine several aspects of a borrower’s financial health to ensure repayment capability. A typical minimum credit score often falls in the range of 620 to 680, though higher scores generally lead to more favorable loan terms.

Lenders also assess a borrower’s debt-to-income (DTI) ratio, which compares monthly debt payments to gross monthly income. While specific thresholds can vary by lender and loan program, a DTI ratio typically needs to be below 43% to 50% for approval. Consistent employment history, often a minimum of two years in the same line of work, and stable income sources are also important considerations. Down payment requirements for these loans are similar to standard conventional mortgages, usually ranging from 3% to 5% for primary residences, though investment properties may require a larger down payment.

Regarding the property itself, eligible types generally include single-family homes, multi-unit properties (up to four units), and sometimes condominiums. Even for fixer-uppers, the property must meet minimum safety and habitability standards before renovations begin. The property’s value is assessed through an After-Renovation Value (ARV) appraisal, which estimates the home’s worth once all planned improvements are completed. This appraisal determines the maximum loan amount available.

A comprehensive renovation plan is also a prerequisite for loan qualification. This includes:
A detailed scope of work outlining all planned renovations.
Requirement that all contractors involved are properly licensed and insured.
Detailed bids and estimates from qualified contractors for all work to be financed.
A contingency reserve, often 10% to 20% of the renovation budget, to cover unforeseen expenses.

Navigating the Loan and Renovation Process

Navigating the conventional renovation loan process begins with identifying a lender experienced in these specialized products. Not all mortgage lenders offer HomeStyle or CHOICERenovation loans, so finding one with specific expertise can streamline the application and approval phases. After selecting a lender, the next step involves formally submitting the loan application with all required documentation, including income verification, credit authorization, detailed property information, and the prepared renovation bids.

The submitted application then undergoes an underwriting review, where the lender assesses the borrower’s financial qualifications and the proposed renovation plan. This review ensures all criteria are met before loan approval. Following this, a specialized appraisal process is initiated, where an appraiser evaluates the property’s current condition and provides an estimate of its After-Renovation Value (ARV), which determines the final loan amount.

Upon loan approval, the closing process involves signing all necessary documents, including the mortgage agreement. At this stage, a renovation escrow account is typically established, into which the funds allocated for renovations are deposited. These funds are not disbursed all at once but are released through a draw schedule as renovation milestones are met.

Contractors receive payments from this escrow account in stages, often after inspections confirm the completion and quality of specific portions of the work. Throughout the renovation, periodic inspections are conducted by the lender or a designated third party to ensure the project progresses according to the approved plan and budget. Once all renovations are completed, a final inspection is performed to verify the work’s satisfactory conclusion. This final inspection triggers the release of any remaining funds from the renovation escrow account to the contractor or borrower, concluding the loan and renovation process.