Rehab Loans

Investing in Rehab Loans for Purchasing a House

Sometimes you find a house in the perfect location but the property itself isn’t perfect. A few upgrades here and there, however, will be absolutely great and turn your property into an ideal home. Fortunately, the FHA offers a financial tool that not only helps you acquire your desired property but also finances the upgrade it requires. These tools come under the category of home improvement loans and are known as a Rehab Mortgage. 

One problem that rehab loan solves for buyers is that it fulfills two functions – and they don’t have to go for separate loans to purchase and furnish the house of their choice, and are free from financial guesswork and the hassle of managing both.
If you don’t have enough finances to purchase a house in a good neighborhood and have it repaired, opting for a rehab loan is a good way to make it possible.

Who is Eligible for a Rehab Loan?

The loan approval depends on the estimate of repair that has to be submitted with the lender before the arrangement can proceed. These loans fall into two categories, The Limited 203(k) and the Standard 203(k). The first category of loan is for those homes that do not require major changes like room additions and structural transformation. To be eligible for this loan, it is important that the home you select must not require thorough redesigning and repair. This means that you should ideally not have making major structural changes in mind for your desired house.

The Standard 203(k) is for homes that require a room addition or intense repairs. There are no limits specified on the cost of repairs you may require but for each area, the FHA has set a mortgage lending limit that you need to comply with. 

If a borrower plans to use an FHA loan on a property they want to resell within 90 days, they are not allowed to do so. There are strict rules on how soon the buyers can sell a property. 

The amount for the loan also doesn’t go directly to the buyer and is usually submitted to an escrow account. To apply for an FHA-approved rehab loan, a qualified 203(k) consultant has to be on-board so they can run you through the processes and make sure the arrangement is smooth. 

Pros of a Rehab Loan
• A rehab loan is accessible for people with limited finances because the down payment happens to be small as compared to other loans.
• The borrowers can qualify for a rehab loan with a credit score as low as 580.
• The mortgage rates for these loans are also economical which makes it a viable option for most people.

Cons of a Rehab Loan
• A Rehab Loan comes with limitations such as the amount of money that can be borrowed. Of course, limits are different for each property.
• Borrowers are required to buy insurance for all FHA-approved loans. The insurance comes with an Annual Premium that has to be paid as part of the monthly payment. There is also an additional upfront premium on insurance.
• The FHA Mortgage guidelines don’t allow the loans to be used for investment properties.

As a tool that is designed to facilitate purchase of a primary residence where a buyer wants to stay at for a long period of time, a rehab loan is a convenient way to buy property. The repairs also help the buyer to bring up the equity of the home and since they are backed by the federal government, the loan is safe and reliable.