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10 Minute Read

Buying a Fixer-Upper Home: What to Know

10 Minute Read

Before and after bathroom pictures.

So you’re thinking of buying a fixer-upper. Whether you’re a first-time home buyer, want to live in a better neighborhood, or just have a passion for restoring homes, choosing a fixer-upper can be a great way to save money when buying a house.

But if you’re not careful, a fixer-upper can surprise you with unexpected costs. That doesn’t mean fixer-uppers are a bad idea—you just need to know what you’d be getting yourself into before buying one. If you want to buy a fixer-upper that’s a blessing, not a curse, we’ll share the top things you need to know.

Let’s get started!

Is It Worth Buying a Fixer-Upper?

Buying a fixer-upper comes with pros and cons: You get a lower price tag than move-in ready homes in the same neighborhood, but there’s plenty of work to do (and money to spend) to make it feel like home.

For example, let’s say you find a $150,000 fixer-upper in a $210,000 neighborhood. By using our mortgage payoff calculator, you can get a glimpse of how much more you save by choosing a fixer-upper:

Cost Type

Fixer-Upper Home

Move-In Ready Home

Home price

$150,000

$210,000

Down payment (20%)

$30,000

$42,000

Loan amount

$120,000

$168,000

Mortgage payment (15-year term)

$1,100

$1,500

Total interest (4% rate)

$40,000

$56,000

 

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Compared to the move-in ready house, the fixer-upper allows you to save $12,000 on the same 20% down payment and costs $16,000 less in total interest. And with less going toward mortgage payments every month, it’ll be easier to cash flow renovations to fully restore the home.

With a discount like that, it’s easy to see why some people get excited about fixer-uppers. Just keep in mind, a fixer-upper with bad bones or a poorly planned renovation can easily skyrocket your overall costs. To buy one that’s worth it, work with an expert real estate agent who can find you a really good fixer-upper—it also helps if you’re handy with a hammer.

How to Find a Fixer-Upper

Before you go house hunting, figure out your (and your spouse’s, if you’re married) must-haves—including renovation projects you’re willing (and unwilling) to tackle. After that, an experienced real estate agent can help you narrow down your best options. Here are some of the most important things to consider in order to find the best fixer-upper:

  • Location. You can fix many things about a house, but there’s nothing you can do about a lousy neighborhood or a 20-minute drive to the nearest grocery store. So don’t compromise on those. Look for a house in an awesome community that fits your lifestyle and that future buyers will like too.
  • Appreciation. This is just a fancy term for home value growth. Look for a fixer-upper that’ll grow in value over time. Research the history of home values and businesses in that area. Are home values rising? Is the number of businesses increasing? Those are good signs! A hip location that’s in high demand is definitely going to help boost value.
  • Inspection. While a home inspection is important to do before buying any home, you definitely want to pay attention to the results on a fixer-upper. An inspection can confirm issues you already plan to fix, but it can also reveal layout or foundation issues that prove the house to be too big of a project for your budget.

How to Handle Renovations

While you might be picturing yourself laughing uproariously in cute coveralls while swinging a sledgehammer or slinging paint, renovating a fixer-upper doesn’t always look like what you see on TV. In real life, you’ll get ready for work with sawdust on your clothes and paint in your hair. But it’s worth every minute if you enjoy it and love the house.

Here are some tips for planning your fixer-upper renovations:

  • Make a budget. To prevent costs from spiraling out of control, you need a home renovation budget. Lay out the projects you want done and price them. Get bids and time estimates for each individual project, then rank them according to priority and start a detailed budget for the project you want done first.
  • Decide to DIY or hire a contractor. Once you know what you want fixed, you can either tackle home projects yourself or—if a project is beyond what you’re willing to handle—hire a contractor. If you start doing DIY and then decide halfway through to bring in a pro, your costs can easily explode outside of your budget—so stick to a plan!
  • Don't overbuild the neighborhood. Be careful not to go switching everything out for marble or adding custom features. If you go all out and upgrade the house to be the most expensive one in the neighborhood, it’ll be hard to get your money back when it’s time to sell the house to future buyers.
  • Cash flow project by project. If you don’t have the money to get everything done all at once, it’s okay—move at the speed of cash. Hold off on starting a project until you have the cash to get it finished. That way, you won’t be burdened by debt—and you’ll thank yourself when the unexpected costs of homeownership come your way.

How Much Money Do You Need for a Fixer-Upper?

If you’re able to pay for your fixer-upper in cash, that’s the best way to go! But if you’re getting a mortgage, never buy a home with a monthly house payment that’s more than a fourth of your take-home pay—otherwise you’d be house poor!

That 25% limit includes principal, interest, property taxes, homeowner’s insurance and, depending on your situation, private mortgage insurance (PMI) and homeowners association (HOA) fees. Use our mortgage calculator to enter your down payment amount and try out different home prices within your budget.

As far as the renovations go, they could cost $10–60 per square foot—with some projects costing up to $150 per square foot. In other words, after buying a 2,000 square-foot fixer-upper, you could spend another $20,000–120,000 fixing it up.1 So you definitely want to have a firm budget in mind about how much you’re willing to spend before purchasing the fixer-upper.

But as a rule of thumb, don’t go crazy spending half the price of your home to renovate a room or two—that probably won’t add a balanced value to the house. The smartest way to decide how much to spend on renovating your fixer-upper is to look at your current monthly budget and go from there. Remember, you’ll save the most money if you cash flow project by project.

Buying a Fixer-Upper With a Mortgage

As you’re shopping for a fixer-upper, you need to know your down payment amount. There are plenty of mortgage options that let you get a house with little or no down payment (more on that later). But the smartest down payment is 20% or more. Anything less than 10% will drown you in extra interest and fees and keep you in debt for decades!

If putting 10–20% down isn’t doable right now, hold off on purchasing a home until you can get control of your finances—fixer-upper or not. You’ll thank yourself later!

The biggest expenses that stop people from saving for a down payment are all debt-related: student loans (51%), credit card debt (45%) and car loans (38%).2 That’s why you need to get out of debt ASAP and have a fully funded emergency fund before buying a home—especially a fixer-upper.

If you’re already debt-free and have an emergency fund, you’re in good shape to get a smart mortgage you can pay off fast. In that case, talk to our friends at Churchill Mortgage about getting a 15-year fixed-rate conventional loan—the overall least expensive mortgage and the only type we recommend.

Beware of Rip-Off Renovation Mortgages

You can find renovation loans out there that allow you to buy a fixer-upper and pay for improvements at the same time. These loans usually let you buy the home with little or no down payment—but remember, doing that loads you up with huge amounts of interest and extra fees. You’re better off taking your time on repairs by saving up to pay for them in cash.

To safeguard yourself, here are some rip-off mortgages with renovation options to avoid:

  • FHA 203(k). The Federal Housing Administration’s FHA loan has a 203(k) option that allows you to borrow anywhere from $5,000 to hundreds of thousands of dollars on top of your home purchase loan for renovations.3 The draw here is that you can buy your fixer-upper and get money for improvements with a down payment as little as 3.5%. But in exchange, you’ll be charged PMI for the life of the loan, extra fees for processing architectural documents and a higher appraisal—on top of all the extra interest you’ll pay and decades you’ll spend in debt for not saving up a big down payment.
  • HomeStyle renovation mortgage. A HomeStyle mortgage is pretty much Fannie Mae’s answer to the FHA 203(k)—but allows for an even lower down payment of 3%!4 Again, a down payment that low will crush your financial goals by racking up your interest payments and keeping you in debt for way too long. It’s not worth it.
  • CHOICERenovation loan. Of course, Freddie Mac couldn’t let FHA and Fannie Mae hog all the fun, so they came up with another copycat loan to lump home financing and improvements into one mortgage. Again, same problem here: The CHOICERenovation product allows you to get a house with as little as a 3–5% down payment.5 Don’t overlook how much extra in interest that will cost you in the end.
  • VA renovation loan. The U.S. Department of Veterans Affairs’ VA loan also comes with a renovation option that helps veterans get into a fixer-upper and pay for certain types of improvements—with no money down at all! But when you purchase and renovate a home with zero money down and things change in the housing market, you could end up owing more than the market value of your home—yikes! Also, VA loans come with a funding fee that’s 1.4–3.6% of your total loan amount.6 No thanks.
  • Home equity loan or home equity line of credit (HELOC). You might hear about this option after you purchase a home and have some equity in it (equity is how much the home is worth, minus how much debt you owe on it). Basically, what you’d be doing here is borrowing against your house to free up some money for renovations. Doing this backtracks all the progress you made in building home equity. Imagine how painful it will be to pay back all that you already invested in the house—plus interest!

Bottom line: If you can’t afford to make at least a 10–20% down payment on your fixer-upper, you’re not in an ideal place to handle all the costs that come with homeownership—especially renovations. Don’t let renovation mortgages lure you down a financial hole. Remember, the only mortgage that will save you the most money is a 15-year fixed-rate conventional loan.

Ready to Find Your Fixer-Upper?

If you want to buy a fixer-upper in a great neighborhood, an expert real estate agent who knows the area will be able to help you pick the one that’s right for you. For a quick and easy way to find one of the best agents in your area, try our Endorsed Local Providers (ELP) program. Your ELP agent will help you spot great deals with tons of potential.

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You need an agent who cares more about you than their commission check.
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