How easy is a rehab loan?
Very…all you need is a broker who understands how they work. I am giving away the secret here: they are as easy as any other loan. They just require a little more paperwork than a regular purchase loan.
What can a rehab loan be used for?
- To Purchase and fix up an existing property in need
- To Fix up a property you already own
- To Purchase a lot and build your dream home (more construction loan than rehab)
- To add an addition to your home
- To remodel your current kitchen, bath, or any other room
- Even to purchase someone else’s unfinished rehab and finish it.
How does it work?
The loan amount you can borrow for the project is based on the after repaired value (ARV) of the property you are planning to fix up. The ARV is what an appraiser feels the home will be worth once you or your contractor have done the work you plan to do. For example, if an appraiser determines that your rehabbed or remodeled property would likely be worth $250,000 once completed you will be able to borrow anywhere from 60% to 90% of that amount to use for both the purchase of the property and the repairs/addition. The percentage you can borrow is based on what you personally can qualify for.
How do I get qualified?
That is a complex question. But it will eventually come down to how much money do you have and what is your credit score. Ideally you would have a credit score in the high 600’s, have about 6 months worth of principal and interest payments for the loan you are requesting in reserve cash, and have your contribution to the loan…ie the amount of the loan not financed by the bank, in an account. If you qualify for 90% of the ARV you will need your 10% down payment to make the full 100% of the money needed to complete the project. Your borrower contribution can come from seasoned cash, (cash that you have had in the bank for 2 months or more) a gift from a direct relative or a secured line of credit such as a home equity line of credit. That is the ideal situation, which would allow for the smoothest process and get you the best rates, however for those who cannot meet this criteria there are other alternatives that your broker can help you with.
Depending on the lender, your contractor or construction “supervisor” will need to prepare a budget to show the scope of work to be accomplished and the timeline in which it will be done. This estimate is also used to determine your “draw” schedule. This means…the funds for the rehab are dispersed in “draws” according to the schedule your contractor submits to the lender. Here’s how the process goes. Your contractor completes a certain series of work such as the demolition of the property or putting in a new soil line. He then submits a draw request to be reimbursed for the costs of the work completed. The lender sends out an inspector to verify the work has been completed and will then cut a check either to the contractor directly or to you the borrower, depending on what you initially specified. This process continues on for each phase of the work to be completed, until the entire project is finished.
What happens when the work is completed?
With most rehab loans the lender will give you the option to roll your rehab loan over to a permanent loan with them. Obviously they want to keep your business and will offer to make you a permanent loan on the property such as a fixed or adjustable mortgage. But you have the choice to find your own “end loan” as it’s called. You don’t necessarily have to use the permanent financing being offered by the lender who you have your rehab loan with. Your Broker can help you determine who is offering the best financing.
That’s great but how much does it cost?
This is one of the most important questions you should ask. There are many different types of lenders out there. The typical scenario is that the lender will charge a few percentage points of the loan amount in up front fees. This amount varies between lenders and the borrowers situation, and can be anywhere from 3% to as much as 12% of the loan amount. During the rehab process you may or may not be required to make payments on the money that you have borrowed for the rehab, at an interest rate of anywhere from 8% to 15%. There will also be inspection charges, between $250 and $500 for each inspection that takes place before the lender releases a draw. Some lenders will allow you to roll all of these associated costs into the amount you borrow, but the total amount can not exceed the amount you originally qualified for.
The costs, rates, and fees discussed above are only examples of the range of products that are out there. What you qualify for and what it costs you is based on your personal finances and your credit. If you have a credit score in the high 600’s as mentioned in the start of this article, it is likely that you would qualify for the lower range of interest rates as described above. With such a wide range of rates and fees and many different lenders with varying requirements, a knowledgeable mortgage broker is the best person to find the right program to fit your needs.
That’s it in a nutshell….easy right?
A rehab loan is a very convenient way to fund your next project. Whether you are an investor looking to buy and rehab a property to flip, or a savvy home shopper seeking a deal on a fixer upper.
Realtors…how is this relevant to you?
Not only does knowing about this mortgage product gives you another tool in your arsenal to either make a sale on a less than pretty home, and help get your own challenging fixer upper listing sold, it also provides for a double sale. Find the ugly duckling, get it listed, sell it to a rehabber that will flip it and sell it to the homebuyer who wants that dream home. Two Sales! Cha Ching. If you can show potential buyers how easily they can turn an “Ugh…what were they thinking?” home into an “Oh my gosh…It’s PERFECT!” home you become the rock star realtor. If you have investors you are currently working with or trying to acquire business from and they are using expensive hard money for their rehabs this is a much lower cost alternative. Being knowledgeable about this product will also give you the confidence to take a vacant lot or shell listing, knowing that there is financing out there for potential buyers. |
