Can You Afford A Fixer Upper As A First Home

Dated: 09/20/2018

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Can You Afford a Fixer-Upper as a First Home? Just Answer These Three Questions

Young, first-time homebuyers are often faced with many confusing choices and steps in the home-purchasing process, including finding a good realtor, shopping for an affordable home that fits their budget, deciding on a neighborhood, determining what’s important in the home they’re looking for, finding financing options, getting a good rate, and so much more. But the one question that should be easy to answer is whether or not they should buy a new home or one that needs some work. Experts at both CNBC and The Washington Post both agree: young homebuyers should definitely consider purchasing a fixer-upper as their first home.

Why? The biggest advantages are clearly cost and value. Fixer-uppers are always cheaper than newer homes. Plus, as homeowners make improvements, their equity in the property increases. However, fixer-uppers are only truly inexpensive if new homeowners are willing to put in the work themselves. A fixer-upper can become the house of new homeowners’ dreams if they can answer “yes” to these three questions.

1. Can You Find Property You Can Afford Where the Value Will Increase?

With help from a good realtor, you can locate properties that you can afford that need work in neighborhoods where the home’s value will definitely increase as you work on it. Be sure you find a place with “good bones,” or one that it is still structurally sound and won’t blow over in the next big gust of wind. Next, for each house you consider, determine how much you should offer based on how much the renovations will cost. Work with a contractor who can help you determine exactly what needs to be fixed. Factor in an additional 10 to 20 percent of those renovation costs for unexpected expenses, then deduct that amount from the home’s value. That amount should be your offer

2. Can You Find Financing?

Now that you’ve found a place and have made an offer, your next step is to find financing. As always, the loan amount for which you can be approved depends on your annual income, the down payment you need, and what you already pay per month on other consumer debt. However, a mortgage loan to renovate a property is different, mainly because banks are hesitant to lend you, say, $200,000 for the property and any renovations you want to make if the property value is less than half of that. Fortunately, both the Federal Housing Authority (FHA) and Fannie Mae can help with renovation loans. Both a 203(k) loan from the FHA or a Fannie Mae HomeStyle loan can cover both the mortgage and any improvements you make. No matter which type of mortgage you get, it’s also important to know the current annual percentage rate of 30-year and 15-year fixed mortgages when you shop.

3. Do You Have the Tools, and Can You Do the Work?

This doesn’t mean you need to have rolling tool chests with several dozen sets of wrenches or a pneumatic nail straightener, or that you even need to run out and buy them. Some of the essential tools you’ll need, however, include circular and mitre and reciprocal saws, hammers and nails, a drill with a set of bits and a nut driver, caulk and caulk guns, a pipe and other assorted wrenches, and a large push broom.

Where should you start? That depends on which part of the house needs the most work. Ask the home inspector or consulting contractor you’re required to have if you finance with a 203(k) or HomeStyle mortgage. If the recommend task is something you can handle (small projects such as recaulking the seals in the bathroom or replacing floor tiles), then break out the tools and go for it. But be careful not to take on too much at once. Pace yourself and enjoy the process.

Once the renovations are finished and you’ve made your home livable and truly yours, you can settle back and enjoy it, or you can sell it for a nice profit and move on to a new home or another project. No matter what your plans are afterward, owning a fixer-upper as a first home can be rewarding.

Written by Bret Engle

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