Buying a fixer-upper: costs, loans and how to avoid surprises

Cosmetic versus costly

Cosmetic updates, such as paint, flooring, fixtures and landscaping, are usually predictable and can be done over time. Structural and system problems are different. Foundations, roofs, electrical service, plumbing, sewer lines and heating and cooling equipment can be expensive, may need permits and can stop you from moving in.

Lenders care about this distinction too. Fannie Mae requires appraisers to identify physical deficiencies that could affect safety, soundness or structural integrity. If they find any, the property is appraised subject to repairs, which may need to be completed before a standard loan can close.

Inspect thoroughly

HUD's notice to FHA buyers explains that an inspector will estimate the remaining useful life of major systems and identify items that need repair or replacement. On a fixer-upper, that estimate matters more than usual. Consider adding specialists: a structural engineer for foundation concerns, a roofer, an electrician for older wiring and a sewer scope for older lines. Ask your inspector what else is relevant.

For homes built before 1978, plan for lead-based paint. EPA's renovation rule requires paid contractors who disturb painted surfaces in pre-1978 homes to be certified in lead-safe work practices.

Get bids before your deadline

Contractor bids turn a list of problems into a budget. Try to get written bids during your inspection contingency, so you can renegotiate or walk away if the numbers do not work.

Renovation loan options

If you do not have cash for repairs on top of a down payment, renovation loans let you finance both:

• FHA 203(k). Under HUD Mortgagee Letter 2024-13, the Limited 203(k) covers nonstructural repairs with total rehabilitation costs up to $75,000 and no required consultant. The Standard 203(k) handles larger and structural projects and requires a 203(k) consultant.
• Fannie Mae HomeStyle Renovation. For purchases, renovation costs may not exceed 75 percent of the lesser of the price plus renovation costs or the as-completed appraised value. Costs can include inspections, permits, consultant fees and up to six months of payments if a principal residence cannot be occupied. It is available as fixed or adjustable rate.

Both release repair funds in stages as work is completed, not as a lump sum at closing.

Budget time and overruns

Old houses hide problems behind walls. Build a contingency, often 10 percent or more of repair costs, and expect delays from permits, materials and contractor schedules. Decide where you will live during the work and what happens if it runs long.

Doing work yourself

Fannie Mae's HomeStyle "do it yourself" option lets borrowers renovate one-unit homes themselves, up to 10 percent of the as-completed value. The lender must approve the work in advance and inspect completed items over $5,000. You can be reimbursed for materials and documented contract labor, but not for your own sweat equity.

The bottom line

A fixer-upper is a good deal only if you understand the repairs, price them before your deadline, budget for overruns and choose financing that fits. Inspect deeply, get bids and compare a renovation loan with paying cash for work.