Buying a Fixer-Upper? Your Lender Needs to Approve
If you’re looking for an affordable home, you might be tempted to buy a house that needs a little work with the commitment to fix it up.
Whether you’re handy or if you plan to hire contractors to work on your property, keep in mind that your financing may be impacted with a fixer-upper purchase: how much fixing up can a house need before a lender decides it’s not healthy enough for a mortgage?
If you’re having a home inspection of the property—which we absolutely recommend—you might assume you can casually ask sellers to make major repairs or even cosmetic improvements.
However, convincing a seller to cooperate with your plan depends on multiple factors.
You’ll have to contend with local market conditions, how motivated the sellers are, the complexity of the requests you’re making, and the financing option you’ve chosen for your fixer-upper project.
Mortgage Financing Options for a Fixer-Upper
Every time you finance a home, a lender requires an appraisal to figure out the value of the home. Your property serves as collateral for your loan.
If you opt for a loan insured by the Federal Housing Administration (FHA), the appraiser will need to go a step further than simply estimating the value of the home.
FHA rules require the fixer-upper also be evaluated to make sure it provides a healthy, safe, livable environment. FHA appraisers will check the roof and basement for leaks and moisture, check the handrails on the staircase, and make sure all the windows open and close.
If there are any issues with the home, you’ll need to ask the seller to pay for repairs. Often the appraiser will need to visit the property a second time to make sure the work is complete prior to settlement.
If you choose a conventional loan, the appraisal will be based on the home’s current condition—unless you can negotiate with the seller to make repairs prior to settlement.
If the repairs that you want done are simply cosmetic, then it’s up to you and the seller to negotiate who will pay for the work.
Seller Concession Rules
In a seller’s market, you’re typically going to have make all repairs and home improvements yourself. A seller can easily sell to someone who isn’t making any demands.
But in a balanced market or one that tilts in favor of buyers, you have more leeway to ask the seller to make cosmetic repairs. However, you’ll have to negotiate with the seller to make the improvements before settlement, rather than pay you directly to have the work accomplished.
You also can ask sellers to pay closing costs to help you afford the fixer-upper, but seller concessions are limited according to the loan you choose:
FHA loans allow up to 6% of the sales price
VA loans allow up to 4% of the sales price
Conventional loans allow up to 3% of the sale price if you make a down payment of less than 10%
The costs for convention loans moves up to 6% if you make a down payment of 10% or more
In the past, lenders might allow an escrow account to be set aside to pay for repairs after settlement, but nowadays lenders won’t allow escrow accounts for this purpose.
Cash-back at settlement to the buyers is also forbidden.
If you want to ask sellers to make repairs after a home inspection, you’ll need to negotiate with them to make sure they complete the work ahead of settlement and pay for it.
To avoid this coordination headache, most buyers opt to negotiate a reduced price for the home. This allows a buyer to pay for the repairs themselves—hence the fixer-upper label—and have the work done to their standards once they own the property.
Just remember to always work with a team of professionals—including a good lender, a reliable home inspector and an experienced REALTOR®—to make sure your fixer-upper turns into the home of your dreams instead of a financial nightmare.
