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Mortgages for Ugly Houses: When You Buy Distressed or "Unique" Homes

houseWhy should lenders care if you want mortgages for ugly houses? Because a mortgage for unique property is riskier. Anything that makes a home less marketable than usual presents a problem if the lender has to foreclose. Foreclosure sales already net less than traditional sales. Add weirdness or ugliness to the mix and the lender could end up with an even bigger loss. But there are home loans for weird houses. And some good reasons to purchase ugly duckling properties.

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Why buy distressed homes, crazy condos or ugly houses?

Everyone wants the pretty, well-maintained home with curb appeal. And if you're buying in a competitive market, that's the problem. Bidding wars happen. All-cash buyers crowd out those who need financing. If you don't have a pile of cash and a competitive attitude, finding an affordable property in a good neighborhood may be impossible. Unless you're willing to entertain a purchase that's "not ready for prime time."

Home Repair guru Bob Vila recommends buying ugly homes for several reasons:

  • You'll likely face less competition and get a better deal
  • You can customize it, assuming that the renovation costs are factored into the purchase price
  • Motivated sellers could be willing to cover your closing costs or even carry the note themselves
  • Older ugly distressed homes may have cool architectural details, and they may also have mature trees
  • The worst house in a good neighborhood has great investment potential if you fix it up

So there are many reasons that you might want a distressed, weird or ugly home. But your lender might not. Here's what to do.

Related: Tips for Buying Distressed Properties

Home loans for ugly houses

Many lenders have provisions against lending on properties that don't fit the norm for their area. That may include dome homes, log homes from kits, rammed earth houses and dwellings created from other alternative building techniques. One of the difficulties with financing a home that doesn't fit in is the appraisal.

If your home is a tract unit in a development of $300,000 homes on smallish lots, the chances are excellent that your home is also worth $300,000. But what if your home is an off-grid dwelling constructed from alternative materials? Accompanied by a barn and a shop building on eight acres? It's tough to value because it does not conform to the neighborhood.

Hard-to-finance properties also include homes with off-putting features or questionable functions. If an appraiser can't reliably value them, or a foreclosure auction can't unload them, lenders will avoid these properties.

Homes most likely to not succeed are listed below. And there are financing options for each.

Mortgage for unique property: extensive acreage

Larger lots are not always a good thing according to many lenders. You're most likely to find them in very high-end suburbs and in rural areas. The concern for the lender is that if the value is mostly in the land, it's really making a lot loan, not a home loan. And that's riskier.

Lenders generally consider lot sizes exceeding ten acres "extensive." But even smaller lots can be labeled "extensive" when they are much larger than the norm for their neighborhood.

Many mortgage lending guidelines allow homes with extensive acreage. But you may have to make a larger down payment, because the lender won't necessarily give you credit for the additional land.

Suppose that your neighbors all have five-acre lots and homes valued at $500,000 (including $200,000 for the land). You want to purchase a home with ten acres and a $700,000 sales price (including $300,000 for the land value). The lender may cap your value at $600,000, not giving you credit for the extra land. And that means you'd have to come up with the extra $100,000 yourself. Or find a lender specializing in rural properties.

To avoid an ugly surprise, verify that the home's acreage is normal for the area before making an offer. Or line up rural property financing ahead of time.

Home loans for weird houses: alternative building, off-grid and green homes

You can build a home with anything from shipping containers to rammed earth to hay bails. You can go off-grid with solar power, a well and septic system.

Mainstream lenders will likely take a pass. Per Fannie Mae: "On a case-by-case basis, lenders must determine whether there is sufficient information to develop a reliable opinion of market value."

However, the rising popularity of alternative and green building techniques is influencing the mortgage market. Portfolio lenders, which create their own guidelines and don't sell their mortgages to investors are expanding their offerings. One company advertises that it will finance a container home if there is another one in the neighborhood, and if its quality and function are comparable to other properties in the area.

How about off-grid? Fannie Mae guidelines (which are standard guidelines for most mainstream lenders) do allow mortgages for homes with solar panels. If you own the panels, you can finance a home that meets the remaining eligibility guidelines. Those include being served by a road, suitable for year-round habitation, and connected to utilities that meet community standards.

Private well or septic facilities must be located on the subject site, unless the subject property has the right to access off-site private facilities and there is an adequate, legally binding agreement for access and maintenance.

Related: Top Green Features Homebuyers Want

Log home mortgages

The availability of financing for log homes depends mainly on the construction and the location. If you live in the mountains and your neighbors have log homes, you'll likely be able to finance it just as you would a "regular" house.

But if you live in an urban environment, or on a canal in Florida, log homes may be considered weird. Appraisers might not know what to do with them. Or they may downgrade the value just to be safe.

Construction is also a consideration. Build with a licensed contractor and a set of engineered plans? No problem. But if you (or the seller) DIY it with a log home kit, lenders may be leery. You should line up your financing before committing to a log home. And make sure the lender knows exactly what sort of home it is. You may have to do some of the work an appraiser normally does -- checking the permits and zoning, for instance.

Mixed-use mortgages

"Mixed-use" means residential property that also has a commercial aspect. For instance, a building with living quarters upstairs and retail space downstairs. Or a condo project that includes shops and a restaurant on-premises. These can be difficult, but not impossible to finance with traditional lenders.

The typical mixed-use project is a multistory condominium with shops, offices and eateries on the ground floor. As long as the square footage of the commercial portion does not exceed 25% of the square footage for the entire project, the presence of mixed-use shouldn't keep you from obtaining a mortgage.

But if the commercial space exceeds 25%, like the example which is half residence and half shop, you'll have to look to less traditional financing. As in non-prime loans with higher down payments, larger fees and increased interest rates.

The one exception to this rule is the VA Loan Guaranty program. VA lenders must consider the effect of commercial space on a home's marketability, but there is no exact limit on commercial-to-residential ratios.

Related: How to Buy and Finance Apartment Buildings

Mortgages for crazy houses

It can be difficult to appraise a crazy house. Distinctions that you find cute or at least not bothersome might be problematic for most buyers. And home appraisers must consider that. And try to find a value. Characteristics that substantially impact a lender's ability to sell the home can make it ineligible for financing.

There isn't really a definition of "crazy" when it comes to floor plans, but, like pornography, you know it when you see it.

  • If you enter the home through the den, you may have a crazy house
  • If you can't get to the only bathroom without passing through the master bedroom, that's a bit off-putting
  • Is your kitchen on the first floor and your dining room on the second floor? Crazy
  • If you have to climb down a ladder from your loft bedroom, that's a little scary
  • Does the exterior have 15 different colors? Is your interior black on black? Consider repainting

Even if you get loan approval for a crazy house, you may have to bring in more money than expected. If you want to buy a $150,000 ugly house with a 3% down ($4,500) HomeReady™ mortgage, you might be out of luck. If the atypical floor plan lowers the appraised value to $125,000, you're looking at a down payment of $29,500.

That's $25,000 for the difference between the home's purchase price and its appraised value, plus the $4,500 for your HomeReady™ down payment.

Related: HomeReady Mortgage Program Makes Borrowing Easier

Good mortgages for bad properties

Mainstream mortgages typically exclude homes that don't meet basic health and safety standards or are just too weird or rundown. But the FHA 203(k) mortgage allows you to finance the property purchase price, plus the cost of making it habitable, marketable and less strange.

FHA lenders base the loan amount on the property value after improvements. So you can buy an ugly home, a distressed dwelling or a weird house and borrow enough to cure its quirks. You need just 3.5% down for this program, and interest rates are comparable to those of mainstream or prime mortgages.

Related: Buying a Fixer-Upper? Here's the Mortgage to Do It

How about tiny homes?

The ability to finance a tiny home depends on exactly how tiny it is.

To a mortgage lender, the typical minimum size for a property to qualify as a home is 400 square feet. In addition, the home must have an approved foundation, be taxed as real estate and be constructed according to local building codes.

If the dwelling is not considered real estate, you likely can't get a mortgage for it. However, it's possible that you'll qualify for manufactured home financing via the FHA. Or a secured personal loan. If your credit is excellent, interest rates for secured personal loans are not much higher than those for mortgages. However, your repayment term will be shorter. Five to ten years is as long as most lenders will go.

Related: I Can't Find Financing For a Round Home. Any Advice?

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