Buy and Fix – All with the Same Mortgage Loan

It’s hard to deny the remodeling movement is gaining momentum. It seems as though everyone from your neighbor to your local politician is remodeling his or her home, and the guy at the hardware store or the contractor across town is everybody’s new best friend.

Countless TV shows depict eager home buyers purchasing charming, character-filled fixer-uppers-and fixing them. The ending is always happy. But what those shows don’t talk about is how much real home owners can pay to make a remodeler’s nightmare into a dream home. Without the benefit of TV.

Thankfully, there’s a mortgage loan that appeals to the dreamer in all of us, and it reduces the fear factor of purchasing a place that needs work.

First-time home buyers are generally familiar with Federal Housing Authority (FHA) loans, but they may not be aware that there’s a branch of FHA loans perfect for those ready to take on fixer-uppers-FHA 203k mortgage loans.

For homeowners with vision, a 203k mortgage provides funds not only to buy a home, but also for necessary remodeling. For those who find the remodeling nightmare is worse than they feared, most 203k loans come with a 10 percent to 20 percent contingency reserve to protect against the unexpected, like shaky foundations or mold. But these mortgages come with specific stipulations.

For example, borrowers must provide estimates for their desired upgrades and renovations, including labor expenses-something that isn’t always easy to do.

Lower down payments and less stringent credit requirements make 203k loans a great option for home buyers with can-do spirits.

However, it is also necessary to meet specific criteria-not all properties or repairs qualify, and you need to determine whether you can do the work yourself.

Talk to your real estate agent about the proper procedures, eligibility, and potential problems. If you’re up for the challenge, it’s great to get help turning your fixer-upper into your dream home.

This Financial Decision Is as Unique as You Are

In order to make mortgage loans available to more low-income and first-time homebuyers, Fannie Mae and Freddie Mac have started backing mortgages with down payments as low as 3 percent of the home’s price. These so-called low-down mortgages have both pluses and minuses, and may or may not fit your unique situation.

On one hand, putting the customary 20 percent down enables a borrower to avoid paying mortgage insurance (PMI) and may reduce the mortgage interest rate. On the other hand, mortgage interest rates are already at historically low levels, so it might be advantageous to use down-payment cash to pay off high-interest credit cards or personal debt.


Before deciding, you should calculate how much you’d actually save by paying off higher interest debt, and the impact a higher mortgage rate and PMI would have on your monthly mortgage payments. Also consider factors such as how much debt you have, the interest rate on your existing debt, and how large a mortgage you want to qualify for.

Based on this information, your other assets, your credit history, and your down payment, the bank or broker will determine how large a mortgage they can offer you and at what rate.

Generally, it makes sense to pay down existing debt if you want to max out your mortgage loan. It’s almost always better to trade high-interest debt for low-interest debt. Moreover, you can deduct mortgage interest on your taxes and thereby further reduce the effective rate you pay on your home loan.