Federal government mortgage programs offer two options for getting home mortgages that require smaller down payments than most other home finance sources. From a cost comparison, a U.S. Department of Veterans Affairs loan will be more attractive, but only the Department of Housing and Urban Development's Federal Housing Administration offers a true fixer-upper type of purchase financing. Also, VA-backed mortgages are only available to active military members, veterans or spouses of deceased veterans.
FHA 203(k) Loans
For a mortgage loan designed for buying and repairing a fixer-upper home consider the FHA 203(k) program from HUD. The 203(k) program allows you to buy a home and get a loan amount for the purchase price plus the estimated costs to repair and/or upgrade the house. There are several different programs under the 203(k) rules ranging from a streamlined program for repairs costing up to $35,000 to an extensive financing package that allows you to use an outside contractor or do-it-yourself. The program covers the mortgage payments if you cannot live in the home and are making rental payments for another home to live in while the renovations are going on.
VA Loans Have a Different Purpose
You can only obtain a VA loan for a home that is in good enough shape to move into and live. That fact rules out buying a home that needs extensive repairs to be livable and financing the purchase through the VA program. If you want to buy a livable home and then upgrade the home, the loan you get from the VA will only cover the purchase price and you would need to find another source of money to pay for the home improvements.
Possibility of Home Equity Loan
A traditional way to pay for home improvements or additions has been to get a home equity loan based on the expected value of the home after the improvements were completed. However, as of the end of 2013, bankers were very tight with home equity type of second mortgages. One possible work-around concerning the VA restrictions would be to buy and finance a home that meets the VA standards and then obtain a second home equity loan to pay for your planned improvements. This option only works if you can find a bank that will lend based on the post-upgrade value of the home.
HUD Rehab to VA Refinance Potential
If you would prefer to have your home financed using a VA loan, and your goal is to have both your fixer-upper home and have it financed using your VA loan eligibility, a two-step approach could be another solution. Apply for a FHA 203(k) loan to purchase and rehab the home you want and then after all of the repairs and upgrades are completed, refinance the final FHA loan amount into a VA loan. However, you should be willing to live with the terms of the FHA loan, since it may be a year or two before you could refinance and the interest rates or home value may have changed to the point that it is better to stick with your existing financing.
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