How to Finance Your Historic House
Purchasing a house is a complex process, with many steps, costs, and decisions along the way. When you’re buying a historic house in particular, there are a few different elements and terms you’ll want to be aware of ahead of time so you can prepare and plan accordingly.
Side note: You’ll find this toolkit referencing things like deed restrictions, easements, and historic house inspections. We will explain these concepts in more detail in upcoming toolkits so you have the complete picture.
But in the meantime, let’s talk about the money. Here’s what you need to know about financing your historic house:
1. Collect supplemental information for your mortgage. Almost everyone who buys a house requires a mortgage to help finance the purchase. The lending institution typically requires certain information about your financial status, such as income and credit history, the house’s sales price, and copies of the house’s appraised fair market value and qualified house inspection. In the case of designated historic houses, lenders may also require information about deed restrictions, easements, or historic designation regulations.
2. Anticipate extra fees -- just as you would with a new house. Many extra fees and costs pop up when you buy a house. These include legal fees for closing on the property, inspection costs, and filing fees. Many states also have real estate transfer taxes and other state or local taxes associated with home purchases. Here, historic houses are no different than new houses, in that these costs typically add thousands of dollars to the purchase price.
3. Consider how location might impact your lending options. Some historic houses, particularly in urban areas, are located in neighborhoods where financial institutions charge higher interest rates or simply aren’t conducting as much business. In these cases, the lender may require borrowers to obtain additional loan guarantees or increase their equity in the property before approving the mortgage.
4. Be prepared for other potential financial arrangements. 1) If you qualify for a Veterans Administration (VA) loan or a Federal Housing Administration (FHA) loan guarantee, the historic house might not fit the standard profiles these programs use. 2) If the inspection reveals major repair or replacement problems, the lender might require evidence of your ability to pay for the necessary work. 3) If you as the purchaser plan to get the repair money as part of the mortgage, the lender may escrow that portion of the loan to pay the contractors directly.
5. Investigate if a property is insurable before you commit to buying it. In some cases, insuring a historic house costs more than insuring a new house of a similar size. Why? Because historic houses often require materials or methods no longer in use, so faithfully rebuilding them in the event of damage or destruction will almost always cost more than repairing a newer house. Check out National Trust Insurance Services to learn more about insurance for historic properties.
6. Consider your taxes -- and consult professionals. Typically, historic houses will have the same property tax burdens as new ones. You may, however, be eligible for federal historic rehabilitation tax credits or tax deductions on donated preservation easements. In addition, 39 states and the District of Columbia have legislation with a wide range of benefits for historic homeowners, from reduced property taxes to state income tax credits for qualified rehabs. Consult your SHPO and a knowledgeable tax accountant or attorney before signing a contract so you know exactly what’s available to you.
7. Get the house appraised (step 1). A professional appraiser uses a four-step process to determine a historic house’s value. First, the appraiser defines why the appraisal is being conducted (to determine fair market value, insurable value, investment value, or a combination thereof); what restrictions and easements are associated with the property; and what the current local real estate market conditions look like.
* Fair market value: an estimate of the highest price the house and its land will command in the open market
* Insurable value: an estimate of the cost to replace the house and other improvements on the land should they be damaged or destroyed
* Investment value: determined by considering the rental income that could be derived from the property and its likely selling price at some future point
8. Get the house appraised (step 2). Next, the appraiser will collect and examine a variety of information -- from local mortgage lending rates to zoning laws -- to derive the property value. Their aim: to determine the property’s “highest and best” use, in other words, the use that would produce the highest value. For example, if a historic property is zoned for both single- and multi-family dwellings, the “highest and best” economic use would typically be the latter.
9. Get the house appraised (step 3). The appraiser then estimates the value of the property as if it were vacant land (compared to prices of comparable vacant lots that have sold recently). The higher the prices of recently purchased land, the higher the property’s estimated value will be. Sometimes it can raise the sales price so high that purchasers of large historic estates will subdivide the surrounding property for new development so they can finance the purchase of the house.
10. Get the house appraised (step 4). In the final step, the appraiser will apply one or more of the “three approaches to value” (definitions below). The principles are the same for historic and new houses, but a couple details diverge. For example, it helps to find an appraiser who’s familiar with the qualities and materials of historic houses and can assess them accurately. Also remember that historic houses often lack comparables, making the market approach harder to calculate. And with cost approach, older homes often have greater physical deterioration, functional obsolescence (no central air conditioning, for example), or economic obsolescence (like when a one-time country home now sits next to a strip mall).
* Market approach: compares the house being appraised to similar ones sold recently, with adjustment values added for differing features (ex. wraparound porches or odd heating/cooling systems).
* Cost approach: calculates the cost of reproducing the house and other improvements on the land (ex. garages, fences, and driveways), then subtracts the buildings’ depreciation value, then adds in land value to determine total property value.
* Income approach: often used if the house is to be rented rather than owner-occupied. Value is derived from estimating the net income (rent received minus owner expenses) that the property will generate over a full year. Rent depends on the property’s size, condition, location, and use.