Financing considerations for purchasing a fixer-upper

Fixer-uppers can present an opportunity get a property at an affordable price and make some personalized updates in a home, but these homes can also impact your financing.

Similar to how you would order a property inspection to get a detailed report on the condition of a fixer-upper, a lender will want to determine the status of the home. It will want to determine if the house is viable as collateral for a mortgage. In the event that you default on your loan, the lender needs to ensure the property will recoup some of the investment.

Before you can receive financing, your mortgage provider will order a home appraisal. This assessment will be based on the value of the home prior to the repairs. The only way to avoid a low appraisal as a result of the property's condition is to convince the seller to fix some of the damages - even if only a few cosmetic ones - before the expert's walkthrough. Asking a seller to pony up for repairs can be an uphill battle, and if you're in a seller's market, there are slim chances you will find one who is willing to oblige your request.

If the home loan you want is from the U.S. Federal Housing Administration, the appraisal process will be more thorough - essentially another home inspection. The FHA requires the property is safe and livable before financing can be granted. The good news is the administration offers a special 203(k) loan program, which allows you to get financing for repairs before you own it rather than having to get one loan for the purchase and another for the improvements.

Keep in mind that any concessions you request of the seller - paying for the closing costs, for example - may be capped by the loan you choose.