How to buy a home and finance the repairs at the same time

You’re preapproved; suddenly a home matching your criteria pops up on the market. Then it hits you, the house needs a ton of work. Here are things to consider when the house you’re trying to buy house needs tender loving care…

The reality is resale homes may need work including everything from a new roof, to doing interior design, to fixing a backyard deck, and the list goes on. Here is how to start:

  • Make a list of all the repairs the home needs
  • Identify the mandatory vs. elective repairs- a new kitchen could be done down the line for example
  • Talk with your real estate agent

Let’s say the house you’re interested in purchasing needs $12k of pest and termite work and the seller has been gracious enough to provide a copy of the report indicating such. In most cases the home list price will be reflective of the work needed, other cases maybe not. Can you get a second opinion on the proposed work? Oddly enough, there could easily be a big variance in one opinion of one particular pest inspection contractor versus another for example.

Home buying tip: work with a contractor who is Blue Diamond Certified. The designation represents the up most professionalism and integrity in the craft.

FHA 203K

The Federal Housing Administration (FHA) offers rehabilitation loans that allow you to finance repairs beyond the “as is” value of the house. This allows you to make repairs and adjustments such as fixing the roof, fixing the termite damage, and maybe sprucing up the interior. A word to the wise- this mortgage loan program is very expensive especially in comparison to a conventional loan. Two drivers of what makes this type of loan more pricey, beside the construction repairs is the two forms of mortgage insurance; both an upfront mortgage insurance premium based on 1.75% of the loan size and monthly mortgage insurance premium based on .8% of the loan amount. If plan to buy a home with this option with less than 10% equity, the mortgage insurance is permanent.

How Low is your debt ratio?

Rather than financing the repairs of the home in the mortgage over 360 months for example. Another approach might be to take out a personal loan for the cost of the repairs and then make the repairs overtime either with little to zero limitations. Your payments should be very low in relationship to your monthly income including your new mortgage payment. The lower the debt ratio, the more flexibility you have been taking out a personal loan to cover the total repairs. For example, you take out a personal loan for $30,000 for the cost of the $30,000 new roof job. Then with your income, you make radical principal prepayments to that personal loan, subsequently reducing the interest that you pay and keeping your cash intact. Be cautious with this approach. Personal loans typically contain very high interest rates.  This approach should be used with financial prudence.

Smart and sensible

When you buy a home expect wear and tear over time. A smart approach would be to take a few hundred dollars per month and put that money aside in a house repair fund, so when things come up you can cash finance the repairs rather than debt servicing the repairs. If the house that you’re buying is going to put a strain on your financial picture, don’t buy that house. It is that simple. You must take into consideration the repairs you want to make over time and how those repairs will be paid for.

Generally, if you can buy a home live in it, enjoy it, spruce it up as finances allow and hold that property for 5-7 years or longer, financially, you’re going to do very well for yourself especially on amortizing fixed rate mortgage where your building equity each month you make a mortgage payment.

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