How to Finance a Fixer-Upper on a Modest Budget

A reader recently wrote to me asking about options for financing the purchase of a home that needs a good deal of repair work. The reader implied her and her husband would have no problem getting a mortgage, but wondered where they might find the additional financing to make repairs and renovations.

It’s a great question. There are many homes on the market today–foreclosures, short sales, and otherwise–that need a little T.L.C. before they can be made into your dream house. In many cases, sellers offer these “fixer-uppers” or “handyman specials” at a severe discount. Let’s face it, renovating an inexpensive, but jacked-up-looking house–with great potential, in a good neighborhood–is historically one of the best ways to get a real deal in real estate. Bear in mind, I’m referring only to homes that have been somewhat neglected, but are still structurally sound with, as realtors like to say, “good bones.”

Still, while banks will readily offer those with good credit a mortgage, few financial institutions are extending the home equity lines of credit that home buyers ordinarily use to spruce up new purchases. The reader who wrote me had an additional challenge: a modest budget. Here’s her email:

“My husband and I are looking to buy a home, but we live in a rather expensive area, and all we can find in our price range are “fixer-uppers.” We only have about 10% for the down payment. How do we finance the purchase of a home that needs a lot of work, when many banks aren’t giving home equity lines of credit anymore?”


Does this couple have options? Yes. After some research, here’s how I responded:

It sounds like you and your husband are prime candidates for an FHA-insured “203(k)” or rehabilitation loan, created specifically for brave home buyers willing to take on a house that needs some work. The loan covers the purchase price of the home itself, plus the expense of remodeling. Lenders require a 3.5% minimum down payment, and this loan must be used for your primary residence–not rental property.

“The 203(k) program was designed to provide a single loan solution for borrowers wishing to purchase or refinance a home in need of repair, without having to obtain multiple types of financing.  A borrower need only obtain one mortgage loan, at a long-term fixed or adjustable rate, to finance both the acquisition and the rehabilitation of the property,” a Housing and Urban Development spokesperson told Black Enterprise. As a result of the loan’s convenient features, the 203(k) program has grown in popularity in recent years, with almost 17,000 loans in 2009, compared to 9,000 in 2008, and only 3,600 in 2007.

To get started, find your diamond-in-the-rough and execute a sales contract, making sure the document states your purchase is contingent on approval of a 203(k) loan for an amount that includes the cost of repairs. Next, find a lender by visiting You’ll then present the bank with a detailed outline of the planned improvements and their itemized cost. The bank will do an appraisal to determine the property’s value after renovations. Once you’ve been approved, the final amount of the loan will also include a “contingency reserve” of 10% to 20% of the repair costs to cover any additional work. At closing the seller is paid, and the remaining loan amount goes into an escrow account from which the borrower pays contractors. Check to find out the maximum amount you can borrow with an FHA mortgage in your area.

John Simons is the senior personal finance editor of Black Enterprise