How to Buy (and Remodel) a Fixer in Portland: 2021 Update

Do you have the itch to try your hand at buying a fixer upper in the Portland real estate market? You could see a ton of benefits to this plan. You can design certain elements of the home to your own taste, for example. Or you might think of it as cutting out the middle man; by doing repairs yourself, you could be spending less than you would on a move-in ready home.

But fixing up a fixer upper comes with its own brand of complications. Some folks might buy a house cheap and pay out of pocket for repairs, but that’s pretty unusual unless the repairs are minimal. Most of the time what you’re looking at is taking out a construction loan in addition to your mortgage. Luckily, there are programs out there that streamline this process, and help out your pocketbook in the meantime.

What is a One-Time Close Construction or Rehab Loan?

Known as a single-close or rehab loan, a one-time close construction loan allows you to combine a loan needed for repairs with your mortgage. So rather than take out two separate loans – and pay two separate closing costs – you’ll be killing two birds with one stone.

Rather than doubling the complications of your home purchase process, one-time close loans essentially fold the construction loan into your traditional mortgage. You’ll have one application, one closing date, and a defined set of parameters for the life of the loan. And as The Balance succinctly puts, a single-close loan gives you more security than you’d get with a separate construction or rehab loan.

There are two main types of one-time close loans that are securely backed by the Federal Housing Authority: FHA 203(k) and Fannie Mae’s HomeStyle loans. Designed for customers who want to buy and renovate at once, these loans provide federally-backed funding in order to expand the possibilities of home ownership. Let’s take a look at how they work and what they can do for you.

FHA 203(k) Rehab Loan

The 203(k) loan is a mortgage meant to encourage home ownership for buyers who might not otherwise be able to afford the cost of both buying and renovating a property. FHA loans value inclusivity, requiring lower down payments and credit scores. Right now the minimum down payment for an FHA loan is 3.5%, and the minimum credit score is 500 (with a down payment of 10%).

How much of the cost of renovation you can secure through the 203(k) loan will depend to an extent on what the lending institution approves, but it must be at least $5,000. There is a maximum for how much you can borrow according to the value of the home, based on local data. You can borrow based on the home value pre-rehab plus the cost of rehabilitation, or up to 110 percent of the property value after rehabilitation, whichever is less. As of January 2021, the cap for FHA loans is $517,500 for a single family home. Their calculator can help you figure out what is available for you.

There are limitations that come with the 203(k) loan. Your interest rate will likely be at least slightly over the average, and you’ll pay mortgage insurance. And while a wide range of repairs are available, the lender also retains more control over what happens in that arena. The mortgagee (meaning, the bank), chooses the consultant that approves the repairs. You’re also prohibited from performing the work yourself (or having your handyman buddy take care of it). And any luxury upgrades are out. We should also note that these loans are not for investment properties – no flipping or renting.

Fannie Mae HomeStyle Loan

Did it bum you out when we told you 203(k) won’t cover luxury upgrades? Well, FHA lender Fannie Mae’s HomeStyle Renovation offers another option. This loan works in a very similar fashion: they combine cost of renovation with your traditional mortgage, you benefit from a streamlined buying experience by having only one payment, etc. But HomeStyle comes with fewer restrictions than a 203(k) loan.

There aren’t constrictions on the types of projects that can be done with HomeStyle Renovation loans. You want that pool put in, and can afford it? Go for it. Fannie Mae also does not require that contractors be chosen from a pre-approved list, meaning more choice for you. The limit here comes down to tear-downs. These loans only apply to renovations, not a complete gutting and rebuilding.

Since last year, HomeStyle upped its percentage of what you can borrow from 95% to 97% of the completed value of the home. They also limit the total amount of the renovation cost less than a 203(k) loan, at the lesser of 75% of the purchase plus cost of renovation or 75% of the value after completion. That gives the buyer more flexibility for working with a property in need of serious repairs. Of course, bank approval always comes into play.

HomeStyle Energy Loan

We’d be remiss if we didn’t mention HomeStyle Energy, which promotes new home buyers to make energy efficient upgrades. Portland is a city in which energy efficiency is increasingly important, down to Home Energy Scores becoming the norm. HomeStyle Energy provides extra funds for upgrades like solar panels and earthquake retrofitting. And it can be combined with your HomeStyle Renovation loan.

Finding the Right Portland Fixer for Sale

Our VestorFilter™ powered home search site has a “smart fixer list” overlay you can apply to any homes for sale search. This smart fixer list looks for keywords in the home’s descriptions and targeted MLS checkboxes to compile a list of true fixers to browse. Combine this with the rest of the incredible statistical data VestorFilter™ provides on each home – and you’ll be able to identify the right Portland fixer for you. Try it out now.

Single-Close or Rebah Loans: Pros and Cons

Like any other loan, single-close loans come with benefits and drawbacks. Let’s take a look at how they fair.

Pros of Single-Close Loans:

  • Low down payment: 3.5-10% for 203(k); 3-5% for HomeStyle
  • Accept lower credit scores
  • Encourages home ownership by making construction loans more accessible
  • Bundles your construction loan so that there’s only one closing and one monthly payment

Cons of Single-Close Loans:

  • For 203(k), lender has more control than buyer over renovations
  • Not all improvement projects are eligible, especially for 203(k) loans
  • In general, higher interest rates
  • Renovations may always become more costly than expected

If you’re a first time home buyer in need of some extra funding, or a go-getter ready to dive in on a project, buying a fixer may mean great opportunity. And single-close loans make a great way to decrease you paperwork and increase your financial health.

That being said, we’d encourage you not to give up on a conventional mortgage just yet. It’s been a tough year for buyers, with a pandemic pummeling Portland’s inventory of homes for sale. But it’s possible 2021 may see that trend rebound on itself. The best way to navigate the ins and outs of the market is to work with a qualified agent. Our top 1% buyers agents are ready to guide you through the real estate market towards the best Portland home for you.

March 19, 2021

Stephen FitzMaurice

Stephen FitzMaurice, Realtor is a top 5% real estate agent in the U.S. A Principal Broker in Oregon, Managing Broker in Washington, he has been licensed since 2003 for residential real estate sales. Call his team in Oregon at 503-714-1111 or in Washington at 360-345-3833.

4% max to sell a home in Portland and SW Washington.
4.25% max to sell a home in Salem and Bend.
Over 2,000 homes sold.