Can You Afford That Cheap, Old House?

Perhaps thanks to the spate of DIY home renovation shows on TV these days – perhaps due to millennials’ low budgets and baby boomers’ unwillingness to move from prime real estate – the fact is that interest in cheap, old houses is on the rise. Homebuyers want properties itch character, that have original floors or exposed beam ceilings. They want shiplap. More than anything, they want their home to tell a story – but in the end, that story ends up being wildly expensive.

The problem with cheap, old homes is that they aren’t that cheap. Though the property itself might sell for less than $100,000, homeowners will likely pump hundreds of thousands of dollars more into the property over the next few years, fixing up electrical systems and plumbing, adding an updated HVAC system, renovating kitchens and bathrooms and generally making the space livable. If you have your eye on a cheap, old home in your area, the first thought on your mind should be: Can I really afford that?

The answer, hopefully, is yes. There are a few programs in place to help you invest in the home of your dreams, regardless of what it looks like. If you are eager to buy a home with character, read on to make sure your purchase is financially sound.

Be Picky During the Inspection Phase

Not all problems in a home are equal. It is important that you weigh certain issues more heavily than you weigh others if you want to avoid buying a house that costs more than you expected. Some major red flags – i.e. issues that will cost more than you will likely get back in return – include structural, electrical and mechanical issues. For example, foundation cracks are a big problem, as are older roofs, termite damage and mold. All of these weaken the bones of the house and are exceedingly expensive to fix.

Meanwhile, you might be turned off by an odd color or disappointed by the wrong type of flooring, but cosmetic issues are relatively easy to change – and, more importantly, they will pay you back. Homebuyers expect the structure of the home to be sound, but they will pay extra for a beautiful look. If you can find an old house that looks like it is falling down but isn’t, you should buy it.

Take Advantage of Funding for Renovation

Some fixer-uppers are priced so low that you can buy them outright, with cash, but usually you will still need some kind of financial help to buy the worst house in the best neighborhood. Unfortunately, if your fixer upper needs some immediate TLC, you won’t be able to get the extra funding through a traditional mortgage; no lender is going to approve a $300,000 loan for a home worth $150,000 right now. Even if you believe your property could be worth more when you are done with it, lenders don’t deal in hypotheticals.

Fortunately, there are two loan programs that can help you afford the remodeling work you need:

FHA 203(k) mortgage.

If you want a fixer-upper, have almost no money for a down payment and have an average or slightly below-average credit score, this is the best choice for you. There are two variations, the standard and the limited, which determine what can be repaired or improved using the loan, how much money you get and how much interest is applied. You can talk to your lender about this product for more specific information that applies to your needs.

Fannie Mae HomeStyle Renovation mortgage.

If you want a fixer-upper, have some money for a down payment and have an average or slightly above-average credit score, this could be a better option. With this loan, you have a year to complete the renovations, which must be permanently fixed to the property and increase its value. There are a few other rules and regulations which you can learn about online.

Don’t Forget About Your Home Warranty

Most home sellers – but especially those with older homes on their hands – offer buyers a home warranty as a sign of good faith that their home will hold up. These policies protect certain systems in your home, such as the HVAC and large appliances as well as occasionally the plumbing and electrical. If something goes wrong with a covered system within the first year, you should dig out that information and call your warranty provider. You will pay a low flat fee, around $70, and they will handle it, which could mean repairing or replacing it. You might consider renewing your home warranty after the first year expires to prolong that protection as long as possible.

Pay Attention to Your Homeowner’s Insurance

Finally, you should also be careful of the kind of homeowner’s insurance you have. When you first buy your home, it might be wise to test out your possible insurer’s customer service – because if you will be completing major renovations on your home, you will be contacting your insurer a bunch to acquire extra coverage for the updates on your home.

A fixer-upper isn’t out of reach – but it isn’t as cheap as you might expect. As long as you have a strong budget, reliable funding and a timeline for your projects, you should come out of home ownership ahead.

Erin Emanuel

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