There’s something about old and/or rundown houses that can bring out the inner handyman in many people. But before you get caught up in DIY dreams of renovating and restoring an old house to its former glory or turning a huge profit on a foreclosure disaster, there are several things to consider. Use the following checklist to decide if buying a fixer-upper is the right choice before applying for a home loan.

1. How much will it cost? Don’t just factor in the purchase price and then name a dollar amount that you are willing to spend. You must do the math to actually determine the realistic costs that are going to be associated with the particular property you want to buy, not just the payments on a home mortgage. You’ll need to thoroughly evaluate the property and note all the repairs needed and what they are likely to cost in your area. If you hope to sell the home after fixing it up, it’s important to research current market values in the neighborhood.
2. You must get a home inspection. Do not even think of skipping this step. To get arrive at a realistic cost estimate, it is imperative to have a thorough home inspection. Hire someone who is reputable and knowledgeable about what it will take to update the home. When you make an offer for a house the contract should have a contingency for the inspection so that if major deficiencies are discovered you can get out of the contract or try to negotiate for a lower price if you still want the property.
3. Does the home need major structural improvements? Replacing plumbing, totally re-doing wiring, or fixing foundation issues can really drain your wallet. Are you willing to pay for these expenses and deal with any surprises that come up in the process?
4. Will you need to apply for a home equity loan to pay for all the repairs? While many homeowners assume they’ll be able to get home equity loans when they apply for them, the fact is that many lenders are turning down many applicants even if they have good credit. Make sure that you aren’t going to be stuck without the funds you need to spruce up a fixer-upper once you’ve committed to monthly mortgage payments.

It’s important to choose the right repairs and renovations if you are on a limited budget. If you plan to remain in the home for many years, you’ll have time to budget and save for any work that is needed as you go along.

Home equity loans have a higher delinquency rate than all other types of consumer loans, according to data from the American Bankers Association. According to an article in the New York Times:

Lenders wrote off as uncollectible $11.1 billion in home equity loans and $19.9 billion in home equity lines of credit in 2009, more than they wrote off on primary mortgages, government data shows. So far this year, the trend is the same, with combined write-offs of $7.88 billion in the first quarter.

Home Equity Loans and Falling Property Values

Some homeowners who’ve fallen behind on home equity loans are likely to threaten bankruptcy if lenders try to collect. Also, because property values have dropped so much, many borrowers don’t see the point of trying to pay off home equity loans. Some homeowners are even willing to walk away from their homes and let them be foreclosed upon rather than pay off home equity loans and mortgages.

Settling Unpaid Debt

In some cases homeowners have arranged debt settlements for home equity loans. Before going this route keep the following things in mind:

• You must be behind on home equity loan payments before the lender will talk debt settlement
• In some cases your loan must already be in collections to work out a settlement
• Even if you settle a home equity loan, you may owe taxes to the Internal Revenue Service for the forgiven portion of debt
• Debt settlement is going to ding your credit score

Sell Your Property

It may make more sense to do whatever you can to sell your property and get rid of your home mortgage and home equity loan. Of course the housing market isn’t doing so great in many places, but you may be able to get your mortgage lender to agree to a short sale. A short sale occurs when the mortgage lender agrees let you sell for less than what you owe on your home loan. The holder of your home equity loan would have to agree to a short sale as well.

It’s possible that there is a home buyer out there who would be thrilled to get your house at a bargain price. In the long run it would be better to sell your home this way than to end up in foreclosure or bankruptcy, or spend more time stressing over all your unpaid loans.

When you apply for a home equity loan the lender requires that your home be used as collateral. This type of loan is considered a second mortgage.

Decline in Home Values

Some homeowners have had a difficult time qualifying for home equity loans during the credit crunch because of falling home values. But if you have good credit and a decent amount of equity, there is a chance you can get approved to borrow money.

It’s never a good idea to borrow money if you don’t need to. But if you are house rich and cash poor, a home equity loan can be useful if you need to make home improvements, pay college costs, or even consolidate high-interest debt.

When considering a home equity loan keep in mind the following pros and cons. Pros include:

• Home equity loans usually have much lower interest rates than credit cards and rates are often fixed.
• Interest paid on home equity loans is tax deductible.
• Depending upon how much equity you have you may qualify for a sizable amount of money.

Among the cons of getting a home equity loan are:

• If your property values declines significantly, you could end up owing more on your mortgages than your home is worth. This is commonly referred to as being upside down on a mortgage.
• Borrowing money by using your home as collateral is risky. If you can’t afford to keep making payments on a home equity loan, you could end up losing your property.

Access to a Line of Credit

Keep in mind that home equity loans differ from home equity lines of credit (HELOCs). A line of credit also allows you to tap into your home equity, but it is set up so you can draw on the money as you need it instead of taking a lump sum. Both home equity loans and HELOCs usually have shorter terms of repayment than first mortgage loans.

Tighter Lending Standards

Some people who were previously approved for HELOCs have had their lines of credit frozen because banks have tightened up on lending. In other cases people who have strong credit histories have been denied HELOCs because banks are reluctant to extend credit.

Shop around to compare home equity loans to find the best deals. Familiarize yourself with all the terms before signing up.

When you’re searching for mortgage rates keep in mind that your credit score plays a huge role in mortgage lender quotes. Here are some things to remember about credit scores and mortgage loans.

High Credit Scores Result in Lower Mortgage Rates

You probably already know that having excellent credit means you are offered better deals on mortgage loans and home equity loans. The best scores are above 760, while scores in the low 600s means you’re considered a subprime borrower. Mortgage  lenders consider people with scores below 600 extremely risky, and in today’s mortgage environment they are likely to be denied credit.

How FICO Scores Work

There are different credit scores out there. The three major credit bureaus all have their own proprietary system of determining credit scores. But the FICO score is probably the most widely used by mortgage lenders and other financial institutions. FICO scores are based upon:

• Your payment history, which makes up about 35% of the score
• How much your owe, which determines about 30%
• The length of your credit history, which determines about 15%
• How much new credit you have opened or applied for, which makes up about 10%
• Other things such as the types of credit you have, which makes up about 10%

Repairing Credit Scores

If you plan to apply for a mortgage refinancing or a mortgage to purchase a home, spend some cleaning up your credit first. Make monthly bill payments on time, pay down debt, and avoid opening new credit lines. Also, review your credit report to make sure that information is accurate, as well as to delete outdated information such as old liens, judgments, and discharged debt. Bankruptcies should be removed after 10 years.

Dispute Inaccurate Information

Dispute information by calling the credit bureau and by following up with a letter.  Depending upon the outcome of your dispute you may have to contact the actual creditor who reported the information contained in your report. Keep careful notes of all interactions and correspondence with credit bureaus and creditors so you have a complete paper trail.

Fixing your credit can have several positive results that include receiving better loan terms on a mortgage and reducing the amount of deposits that have to be made with utilities.