Rehab loans have proven to be a valuable commodity for those looking to both purchase and rehab a home. It is worth noting, however, that not all rehab loans are created equal. A number of loan options exist for buyers to choose from, each of which coincides with its own pros and cons. That said, it’s in your best interest to vet every option available and objectively determine which loan suits your needs.
Not to be confused with traditional home loans that are typically reserved for acquiring properties, rehab loans typically designate a portion of the borrowed money towards repairs and improvements, in addition to the acquisition. More specifically, however, rehab loans are usually used to cover both the purchase price of a home and any subsequent repairs that may be needed.
There are a number of rehab loans for investors, each of which serves their own unique purpose. However, there are two rehab loans, in particular, that have been more widely accepted in the real estate industry than their counterparts: HomeStyle renovation (HSR) loans and FHA 203(k) loans. Both the HSR loan and the FHA 203(k) loan have proven instrumental in rehabbing houses across the country, but there are certainly differences in the two that warrant your consideration–differences that’ll help you choose which loan is best for you.
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HomeStyle Renovation loans offer borrowers an easy and affordable way to simultaneously finance the purchase price and renovation costs of a home. Or, as Fannie Mae so eloquently puts it, a HomeStyle Renovation loan “lets borrowers finance improvements, renovations or repairs to a home at the time of purchase or as a refinance transaction—up to 75% of the as-completed appraised value of the property.” Otherwise known as a HomeStyle Renovation Mortgage, these flexible sources of capital allow their borrowers to make repairs with the same mortgage they used to buy the house, rather than resorting to more costly sources of funding like a second mortgage or home equity line of credit (HELOC).
There are, of course, limitations to the amount someone may borrow. The amount a person may take out is limited to 75 percent of either the purchase price plus renovations or the as-completed appraised value––whichever is cheaper.
While buyers may use HSR mortgages to purchase and renovate a 1-unit second home or investment property, they lack the short-term appeal most entrepreneurs covet. More specifically, the length of the typical HSR loan is more conducive to someone looking to renovate a primary residence, and not a rehab they intend to fix and flip immediately. That said, buy and hold investors may find the HSR mortgage to their liking.
Not unlike the aforementioned HSR mortgage, the U.S. Department of Housing and Urban Development’s 203(k) program allows borrowers to allocate some of the newly acquired capital towards repairs, improvements and upgrades. According to the program’s website, the FHA’s Limited 203(k) loan “permits homebuyers and homeowners to finance up to $35,000 into their mortgage to repair, improve, or upgrade their home.” There are, however, restrictions to take into consideration; namely, that 203(k) loans can’t be applied to investment properties. The recipient of a 203(k) loan must live in the same property in which the loan is applied to. What’s more, the use of the 203(k) loan is limited to the projects explicitly listed by the HUD.
There are a number of different types of rehab loans to choose from, each of which come complete with their own qualifiers. That said, there are some general qualifications that are more or less universal. It’s quite common for rehab loan qualifications to look something like this:
Rehab loans come in all amounts and durations, but that shouldn’t stop you from asking the questions that matter the most––never be shy to ask anything. Rehab loans represent a large debt and warrant your utmost attention. As such, never forget to ask the following questions:
Don’t be shy to ask some of the most obvious questions; namely, those pertaining to the amount of the loan. If for nothing else, it’s not always possible to finance the full price of an acquisition and the resulting rehab. It’s quite common for some loans, rehab loans included, to only cover a potion of the initial cost. It’s important to have an idea of how much money you can expect.
It has become common practice for some lenders to charge a pre-payment or exit fee, and it’s in your best interest to know whether or not your loan does the same. To avoid losing out on interest, many lenders will actually penalize borrowers that pay off their loan too soon. You should, therefore, make sure you won’t be penalized for making too many payments of your own.
The length of the loan will play an important role in how borrowers proceed. If for nothing else, the amount of time spent paying back the money will determine everything from the interest rate to the monthly mortgage obligation. Before you even consider a rehab loan, make sure you know how long you’ll be locked in for.