If you’re struggling to afford a home that meets your needs, or you’re a first-time homebuyer eager to get on the property ladder, you may be tempted to buy a fixer-upper and put in the time, hard work, and money needed to transform it into the home you want.
While the lower upfront cost of fixer-upper houses is attractive, it’s also important to consider the drawbacks of buying a home that requires expensive and time-consuming work.
Here’s what you need to know about fixer-uppers before you buy one.
Key Takeaways:
- Financing options to buy a fixer-upper home include traditional mortgages and renovation loans.
- There are several first-time homebuyer programs for buying a fixer-upper, including down payment assistance and closing cost assistance.
- To determine if a fixer-upper is right for you, consider if you can do the repairs yourself and if you can handle setbacks and surprises.
What Is a Fixer-Upper Home?
A fixer-upper is typically an older home that requires extensive repairs. The repairs can vary from cosmetic to structural, and the poor condition of fixer-uppers usually make them less expensive.
Cosmetic fixes could include updating a bathroom that looks more suited to your grandmother’s taste, or taking out carpets and refinishing the hardwood floors underneath. More serious repairs could involve fixing termite damage or cracks in the foundation, or upgrading electrical wiring to meet current building codes. Some issues can dramatically affect the safety of the home, and you may be unable to live in it until repairs are made.
How To Find Fixer-Upper Homes
Before you can learn how to buy a fixer-upper, you’ll need to know how to find fixer-upper homes.
“You can use a really good Realtor, who has their pulse on city neighborhoods,” says Herndon Davis, a mortgage loan officer and real estate consultant based in Fort Lauderdale, Florida.
If you aren’t finding what you want with a real estate agent, consider taking a drive around your target neighborhood. With some luck, you might find a fixer-upper that fits your needs.
How To Finance a Fixer-Upper
When getting a mortgage for a fixer-upper, the extent of the renovations affects your financing options. Let’s explore what types of loans can work for a fixer-upper home:
Financing a Fixer-Upper Home
| Loan Type | Features |
| Conventional loan, FHA loan, USDA loan, or VA loan | – Suitable if the fixer-upper home just needs cosmetic work. – You can apply for a home equity loan or HELOC to fund cosmetic improvements. – This will not provide additional funding for extensive renovations. |
| FHA 203(k) loan | – These loans help qualified homeowners and homebuyers complete extensive renovations on a property. – Issued for a minimum of $5,000. – Issued for a maximum of the value of the home plus the cost of improvements, or 110% of the home’s value after renovations. |
| VA renovation loan | – The cost of repairs are included in the loan amount. – Good for fixer-uppers that need relatively small repairs from an approved list of options. – You must work with a VA-approved builder. |
| HomeStyle loan | – Renovation loan guaranteed by Fannie Mae. – Provides more freedom with the renovations you can make. – Higher credit score requirement than FHA 203(k) loans. |
| ChoiceRenovation loan | – Renovation loan guaranteed by Freddie Mac. – Focuses on energy-efficient improvements and housing resilience against natural disasters. |
Mortgage options
When the home in question simply needs cosmetic work, then traditional mortgage options such as conventional loans, Federal Housing Administration loans, Department of Agriculture loans, and Veterans Affairs loans may work for you, if you qualify.
If you’re approved for one of these loans, you could apply for a home equity loan or home equity line of credit. This will provide funds after closing for projects on your to-do list — though you’ll need to meet various lender requirements, such as having at least 15% to 20% equity in the home.
Renovation loans
If you’re buying a fixer-upper with extensive issues, then a renovation loan is likely your best financing option. Renovation loans typically allow qualified homebuyers to borrow money to pay for the home as well as improvement costs at the same time.
FHA 203(k) loans
FHA 203(k) loans help qualified homeowners and homebuyers rehabilitate a property. An FHA 203(k) loan can be used to pay for structural alterations, elimination of hazards, plumbing, septic systems, roofing, flooring, energy efficiency, and more.
These loans are issued for a minimum of $5,000. The maximum loan amount is up to the value of the home plus the cost of improvements, or 110% of the home’s value after improvements are made.
VA renovation loans
VA renovation loans allow qualified buyers to include the cost of approved repairs in their total loan amount. The lender will determine what maximum loan amount you qualify for. Although this isn’t a loan option for major issues, it could work if you need to make relatively small repairs.
It can be difficult to find a lender that offers this type of loan. If you do find one, you’ll need to stick to the list of approved home repairs, which means no structural changes or luxury improvements allowed.
After closing, you’ll need to work with a VA-approved builder. All these extra steps can make this a time-consuming loan process.
HomeStyle loan
HomeStyle is a renovation loan guaranteed through Fannie Mae. Although you’ll need a higher credit score compared with the requirement for an FHA 203(k) loan, you’ll have more freedom in the types of improvements you can make.
ChoiceRenovation loan
ChoiceRenovation is a renovation loan guaranteed through Freddie Mac. The loan is designed to help qualified homebuyers with the cost of renovations. The permitted renovations are rather flexible, but they focus on energy-efficient improvements and housing resilience against natural disasters.
How Do I Budget For Buying a Fixer-Upper?
The list price of a fixer-upper is just the starting point. Depending on what renovations are necessary, the final price tag is usually much higher.
Get a home inspection
While it’s not required, a home inspection is highly recommended if you’re buying a fixer-upper because you don’t want to buy a property that’s in worse shape than you were prepared to deal with.
Home inspections usually cost $300 to $500. It’s worth paying for an expert opinion on the condition of the home and any problems it might have.
Determine what repairs you can do yourself
The home inspection will help you understand what repairs need to be done. Once you have a list of the necessary repairs and any upgrades you want to make, decide which projects you have the time and skills to tackle yourself. You’ll still need to pay for materials and tools, but the labor will be free.
Get quotes from contractors
The renovation process will likely require professional help. It can be challenging to estimate the final cost of your renovations upfront, so compare quotes from multiple contractors to ensure you’re receiving an accurate assessment of the costs and how long the process will take.
Find out if a permit is needed
Many state and local governments require permits for additions, remodeling, roofing, and electrical work. Find out what permits are required — especially if you’re doing some of the work yourself.
Permits can be expensive and time-consuming to get, but they help ensure that the completed work meets safety standards and building codes. You can expect each permit to cost $450 to $2,000. Failing to get the proper permits could land you in legal trouble and make it harder to draw from your equity.
Be prepared to pay more
Even if you diligently price out your renovation projects, it’s likely that you’ll run into unexpected issues along the way. Even estimates touted as accurate can come in well below the actual cost. It helps to build some room into your budget, so you can more easily handle additional expenses if they appear.
First-Time Homebuyer Programs for Buying a Fixer-Upper
If you’re a first-time homebuyer, there are many financial assistance programs that you can take advantage of. These programs can help you save money or get additional funds for a down payment.
Down payment assistance
Down payment assistance programs are often funded by local nonprofits or governments, and can take the form of loans or grants that qualified first-time homebuyers use to make a down payment.
DPA loans
A down payment assistance loan could help you afford a fixer-upper home. It typically takes the form of a second mortgage, which you pay off through regular monthly payments — like your primary mortgage. You can use the money from a DPA loan to make a larger down payment, which could help you afford the home or avoid costs like private mortgage insurance on your primary mortgage.
DPA grants
Down payment assistance grants are free money that you can use to make a down payment on a home. Unlike DPA loans, you don’t have to repay the funds from a DPA grant.
Tax deductions
Many buyers can take advantage of tax deductions that reduce their tax liability. That helps you save money or receive a larger refund when you submit your tax return.
Some deductions and credits include:
- Mortgage interest credit. This credit helps people with lower income afford a home by getting applied toward their taxes for the mortgage interest they paid.
- Mortgage interest deduction. Under certain conditions, homeowners can deduct the home mortgage interest they paid from their income taxes.
- Property tax deduction. Homeowners can deduct local property taxes from their federal income taxes.
- Origination fee deduction. If you pay for mortgage points, qualified borrowers may be able to deduct this cost as home mortgage interest over the life of the loan.
Closing cost assistance
Many of the same programs that help with down payments can be used to help pay closing costs, such as loan origination fees and appraisal fees. Check with your state’s housing finance authority, your lender, local governments, and nonprofits to see what programs are available.
Pros and Cons of Buying a Fixer-Upper
When making a major financial decision, it’s critical to weigh the advantages and disadvantages.
Pros of buying a fixer-upper home
Here are some benefits of buying a fixer-upper:
- They can be more affordable. Fixer-uppers need extensive work, and this is usually reflected in their price. Home prices have typically increased over time, so the lower price of a fixer-upper can be a big draw. Younger first-time homebuyers are especially susceptible to feeling the pinch of rising home costs, and are therefore more willing to buy a fixer-upper.
- There are financing options available for renovations. HomeStyle loans and ChoiceRenovation loans are just a couple of the options available to help you fund home projects, if qualified.
- There may be less competition. Many homebuyers prefer move-in ready homes. You’re less likely to get into a bidding war when buying a fixer-upper.
- You can customize the home to suit your tastes. Some properties don’t require any immediate repairs or upgrades, so it may be a while before you decide to remodel your space. With a fixer-upper, you can customize your home immediately as you’re renovating.
- You can build equity quickly. Home improvements increase your property’s value, which means your equity will grow as soon as your fixer-upper is modernized. This increases the profit when you sell and gives you more borrowing options with a cash-out refinance, home equity loan, HELOC, or reverse mortgage.
- It could be a good investment. After factoring in the discounted listing price and the cost of renovations, you could end up getting a good deal when you buy a fixer-upper compared to a home that’s move-in ready. Just keep in mind that not all home projects have the same return on investment in terms of the property’s value. For example, refinishing hardwood floors has a 147% cost recovery, while adding a new bathroom only recovers 63%.
Cons of buying a fixer-upper home
Now, here are the drawbacks of buying a fixer-upper:
- Unexpected issues can delay your move-in date. Even if you consult with multiple contractors, home renovation projects are highly susceptible to delays that can stall your timeline.
- You may exceed your budget. If delays cost more time, then they’ll probably cost more money. Even the most experienced contractors can make mistakes, which could eat into your budget.
- You might have to continue paying rent. Some fixer-uppers are unlivable until renovations are complete. If that’s the case, then you’ll have to find and likely pay for short-term living accommodations.
- Living in the home during renovations can be stressful. If you choose to live in the home while contractors are working, expect loud noise and other disruptions throughout the day. It may be difficult to escape the dust, and some of the rooms may stay unfinished for a long period.
Is a Fixer-Upper Right for a First-Time Homebuyer?
Fixer-upper houses can be a good choice for the right first-time homebuyer. Here’s what to ask yourself before buying a fixer-upper.
Can you do the repairs yourself?
It’s important to be honest with yourself about how much of the home repairs you’re willing and able to do on your own, especially if you don’t have much experience. Many of us can paint walls, but laying tile or installing plumbing fixtures requires a higher skill set that you might not have.
“A fixer-upper requires a homebuyer who has the time, money, energy, and resources to put into the project,” says Matt Woods, co-founder and CEO of Sold.com, an educational resource and comparison engine for home sellers, based in Irvine, California.
Can you handle setbacks and surprises?
Setbacks and surprises are part of many homeownership journeys. When you purchase a fixer-upper, there’s potential for more surprises to crop up — and for those surprises to be more difficult and expensive to address. If you dread the prospect of tearing into a wall only to discover mold or the need for major plumbing or electrical upgrades, then buying a fixer-upper might not be right for you.
“Many homebuyers buy fixer-uppers only to get burnt out on their project part of the way through, and it takes some serious dedication to see this type of project to completion,” Woods says. “Seriously evaluate your lifestyle and your abilities before buying a fixer-upper and accidentally biting off more than you can chew.”
Are you patient and flexible?
When you run into setbacks, you’ll need the patience and flexibility to adjust your renovation timeline. Depending on what you find, you might need to postpone your move-in date by weeks or months. In the worst-case scenario, a major issue could lead to yearslong delays.
Also, since major setbacks can be expensive, it’s ideal to be flexible with your budget priorities. Doing it right may require you to scale back a project, or to delay work until you can afford it.
When Is It Worth Buying a Fixer-Upper?
So, should you buy a fixer-upper house? The answer varies depending on your preferences.
“A general rule of thumb is when you have found a property whose value after repairs or its new market value is at least 30% greater than the cost of acquisition and repairs,” Davis says. “That way, you have sizeable equity in the home. Anything less isn’t worth it, in my opinion.”
Another situation to consider is when a tight housing market limits your options. If you need a relatively affordable place to live, then repairing a fixer-upper could be worth it for you to own a home.
Fixer-Upper FAQ
Here are other frequently asked questions about getting a fixer-upper.
As a first-time homebuyer, you may underestimate the work required to fix up a home in bad shape. Going over your budget or timeline could lead to stress and frustration. If the repairs take longer than expected, you might find yourself needing to find and move between short-term housing options, which can be inconvenient and expensive.
The market you buy in will have a big impact on whether it’s cheaper to purchase a fixer-upper or a move-in ready home. In some markets, a fixer-upper won’t be significantly cheaper than a move-in ready home. But in other markets, you could save significantly on the list price.
The Bottom Line on Buying a Fixer-Upper
A fixer-upper can open more doors for potential homebuyers. If you’re willing to put in the time and effort, it’s possible to buy a fixer-upper now and make it into the home you want. The process takes time, and could cost more than you think it will. But if you’re dedicated and smart about it, buying a fixer-upper can be a good way to reimagine a home that’s right for you.
T.J. Porter contributed to the reporting of this article.
