When considering what to offer, take the market value of the house, deduct what you think repairs will cost, add a little extra in the event your repair estimates are low, and you will come up with a fair offer. Another formula that works is to consider how much the house would be worth if it were in top-grade condition. You should buy at 20–30 percent below what the house would cost if it were not a fixer-upper.

In the sales contract, include the phrase “subject to the buyer obtaining a satisfactory inspection report and satisfactory repair bids within 10 business days.” The inspection is standard these days; the repair-bids phrase should be incorporated in fixer-upper bids.

If you are not satisfied with the reports and recommendations you receive from the house inspector and from the repair people you bring in for estimates, you can cancel the agreement to purchase and have your earnest money deposit refunded.

If a house needs extensive work, many buyers skip calling in a house inspector and instead call a contractor — the person they will engage later to do the repair work — to look at the property. Naturally, they stick close to that individual as he goes through the property, jotting down his comments to familiarize themselves with, and remember, the house's problems.

If You Need a Home-Improvement Loan

If the home you buy needs repairs or improvements, you will have to come up with the money for that renovation. It may take a little — maybe only a couple thousand dollars — or a lot to make your home the way you envision it.

Keep in mind that loans cost money, no matter how advantageous the borrowing terms. It is better to pay cash for repairs if you can. An exception might be if you are using a government-backed, low-interest loan, maybe one at 5 or 6 percent. Then you might leave your savings alone, especially if they are drawing a higher rate of return from interest.

Naturally, if you are making substantial repairs to a fixer-upper, you are not likely to be able to pay for the work in cash. But if you are doing a small job of $5,000 or so, you might be better off waiting until you have saved that money to make the repair.

Where to Find Additional Loans

Look at your own resources first. If you own securities, you might ask your broker about borrowing against some of the paper you hold. That could result in a better deal for you than heading to a commercial lender.

Credit unions are excellent loan resources. If you don't belong to one through work, look for other “ins” you might have to a credit union. Some credit unions exist for members of particular professions. Perhaps you can find one for your religious group or your community. Does your special interest or hobby association have a credit union?

You can also look to unsecured personal loans, where your home is not put up as security, which you can find offered by commercial lenders. The terms and amounts vary from one lender to another, but essentially you can expect to be able to borrow several thousands for five or ten years at a rate of interest likely to be around 15 percent (or higher), and will be fairly costly to you in the long run.

You are judged for eligibility the same way you would be for any loan: based on your income, employment record, and credit history. You will need to get three written estimates for the work you want done; this is a requirement of lenders to make sure you are not overpaying for the improvement.

The lender will want to see those estimates, but as long as they are considered reasonable by the institution loaning you money, you are free to choose the contractor you want from among them. The lender also requires an outline or plan for the project and the name of the contractor you have chosen. The interest on these loans is not tax deductible.

Some Other Sources to Try

There is more good borrowing news. Besides the tried-and-true lender we all know so well, there are steady loan sources that may not be familiar to many or most people. These sources sometimes offer good borrowing terms, especially if they are federal or state government programs.

The 203(k) program, offered by the federal government through the Federal Housing Authority, or FHA, enables the buyer of a one- to four-family house to borrow both the sale price for the house and its renovation loan. The loan amount offered is based on the estimated post-refurbishment value of the house.

The maximum amount you can borrow for renovations is subject to FHA lending guidelines for that particular geographic area. (There are no income caps for buyers, however.) Financing is based on an estimate of the value of the home after renovations, with the mortgage and renovation loan created for that total amount. Interest rates are slightly higher than conventional mortgage rates, but they are lower than rates for conventional renovation loans.

The minimum you can borrow is $5,000, but with a fixer-upper, and sometimes with any old house, you will find that you have at least this much work to be done. The money can even be used for paint, sod, and appliances. Call your local HUD office for information about area lenders and this program.

Another popular federal government loan source is the FHA Title l program, in which the FHA insures loans made by private lenders for as much as $25,000. The payback period can be as long as twenty years. Interest charged might be higher than with a home equity loan (discussed in the next section) but lower than with a home-improvement loan from a commercial lender. The interest is tax deductible.

Here are some of the advantages of the Title 1 program:

• You do not have to live in any particular area to secure one of these loans.

• You seldom need any security for loans under $7,500, other than your signature on the note, and you do not need a cosigner.

• You do not have to disturb any mortgage or deed of trust you have on your home.

• You need only to own the property (or have a long-term lease on it), fill out a loan application that shows you are a good credit risk, and execute a note agreeing to repay the loan.

• Your loan can cover architectural and engineering costs, building-permit fees, title-examination costs, appraisal fees, and inspection fees.

Check with your local utility if you are planning any energy-saving improvement, such as the installation of storm windows or added insulation. Some utilities work with local lenders to allow homeowners to make energy-efficient improvements at as little cost to them as possible. For example, families with incomes of up to $30,000 a year can qualify for interest-free loans of $500–$4,000. Those with higher incomes are eligible for loans at a low 5 percent interest rate.

What About Home Equity Loans?

You might have another choice when looking for funds. You could draw on the equity in your home. You may have heard about this borrowing style.

Home equity can be borrowed in two different ways: through a home equity line of credit, which you can draw on as you need the money, or through a home equity loan, which comes as a lump sum, similar to a second mortgage.

With the line of credit, you need only draw on your equity by writing a check or using a credit card as you need it. You pay interest only on the amount you borrow. But since a loan comes to you in a lump sum, you pay interest on all of it.

One advantage to each is that the interest is tax deductible (most other loan programs are considered consumer debt, with no tax deductions allowed). The disadvantage is that your house is collateral. If you miss payments, you can lose your home.

This last point of caution is particularly important to the first-time buyer. If you do qualify for a home equity loan, be absolutely sure you can carry the new burden of a mortgage before taking on another home-related one. It is easy to become overwhelmed by the debt.

If you are a first-time buyer, you might have had to scramble to put together a minimum down payment. So where is your equity? Usually, lenders offer 70–80 percent of equity in a home — usually, not always. These days there are programs that offer borrowers not only 100 percent equity, but also more money than their home is worth!

When lenders have money to lend, and the buyer has good credit, then 100 percent financing is often available. Not all lenders offer 100 percent financing, but in every major market in the U.S., this 100 percent financing is available. Needless to say, the interest rates are high, and the previously mentioned cautions about possibly losing your home also apply.

Credit Cards: Skip This Option

Paying for a home renovation with credit cards is a good deal more costly than the more traditional borrowing methods you have read about here. With credit cards carrying interest rates of 17–19 percent and upward, you will be paying off that loan forever, even if you shift your account from one lender to another, taking advantage of low, introductory interest rates. They almost all eventually rise. Do some shopping around, and you will find far more agreeable terms.