It's the lament of first-time home buyers in just about every housing market: There aren't enough entry-level homes available that are move-in ready.
One solution is to broaden the search to fixer-uppers. With a renovation mortgage, you can get one home loan that combines the purchase price with the cost of improvements.
Faced with a shortage of affordable homes, it makes sense to consider buying and fixing up dwellings that are outdated or in need of repair.
The two major types of renovation loans are the FHA 203(k) loan, insured by the Federal Housing Administration, and the HomeStyle loan, guaranteed by Fannie Mae. Both cover most home improvements, whether major or minor.
"Basically, every kind of repair that can be done to a property, we do it," says Brad McMullen, vice president of renovation lending for PrimeLending, a national mortgage lender that emphasizes renovation loans.
Both FHA 203(k) and HomeStyle can be used for structural and cosmetic renovations. With both loan types, renovation work may begin immediately after closing.
FHA's 203(k) loan is for primary residences only. It requires a minimum credit score of 500 with a down payment of at least 10 percent; a credit score of 580 or higher allows a down payment of 3.5 percent. These loans can't be used for luxuries like installing a pool.
There are two types of 203(k) loans: limited and standard. The limited is for renovations costing $35,000 or less that don't require major structural work. The standard is for projects upward of $35,000 or involving major structural work.
A 203(k) standard loan requires a HUD consultant, who helps the homeowner solicit and analyze bids and oversees inspections of the work.
Fannie Mae's HomeStyle loan may be used to buy and fix up a primary residence, second home or investment property. It requires a minimum credit score of 620. Minimum down payment is 3 percent or 5 percent, depending on whether the home is owner-occupied and the borrower is a first-time home buyer or has a low to moderate income.
HomeStyle loans have few restrictions on improvements, other than that they "should be permanently affixed to the real property (either dwelling or land)," according to Fannie Mae guidelines.
To prevent cost overruns, make sure estimates are specific about materials and include costs for inspections, permits and consultant fees (if applicable).
Another pitfall: over-improving the home. If every house on the block has one story and three bedrooms, it might be a bad idea to add a second story with two bedrooms. It will be difficult to get an accurate estimate of the house's post-renovation value because of a lack of nearby comparable houses.
After finding the house you want, choose a lender, decide on a loan type and hire a HUD consultant. Then, with the consultant's guidance, get estimates from contractors. Your lender will need copies of the estimates.
The renovation work may begin immediately after you close the loan. When the improvements are complete, you'll have your home the way you want it — sooner than you might have thought possible.
Holden Lewis is a writer at NerdWallet. E-mail: hlewis@nerdwallet.com. Twitter: @HoldenL.
