What Is A Rehab Loan?

What Is a Rehab Loan?

A rehab loan, also referred to as a renovation loan, is a type of loan that enables homebuyers and homeowners to finance the renovation of a home through a single mortgage. Instead of applying for multiple loans, a rehab loan allows homebuyers to purchase or refinance their primary home and renovate it with one convenient loan. By allowing the buyer to finance the cost of improvements into the purchase or refinance of a home, home rehab loans take the financial guesswork and frustration out of renovating a home.

hard money rehab loan works for the real estate investor who wants to pay cash for the purchase of a property and needs additional money to prepare the property for resale. Hard money rehab loans also work for the borrower who already owns a property and needs additional financing to complete improvements. There are many variations to rehab loans, each lender will explain their criteria. Rehab loans can expedite the completion of a property to get it on the market. A hard money lender will typically want a client to adhere to a proposed plan of improvements. Failing to do so will cause delays. There are also necessary inspections throughout the process. This ensures that a lender can fund the work as completed.

Rehab loans can be offered in many formats. Therefore, it is best for a borrower to discuss rehab loans directly with a lender.

How does a rehab loan work for investors?

Private lenders focus heavily on collateral, i.e. an investment property that secures a hard money loan. However, it’s always a good idea to get pre-qualified before you start house hunting. A hard money lender looks at your credibility as a potential real estate investor. How is the market in the target investment area? What is the availability of resources, other property inventory, and demand for the property at resale or rental?

Since the current real estate market is experiencing record low-interest mortgage rates, and higher demand than supply, more and more buyers are seeking creative options to take advantage of the booming housing market.

Finding the right hard money lender may seem hard, but it’s not.

When Should I Use a Rehab Loan?

Rehab loans are best utilized for non-structural repairs, such as getting new flooring or renovating a bathroom or kitchen.

What Are the Steps to Getting a Rehab Loan?

The steps to getting a rehab loan are very similar to those of a traditional home purchase, with the added steps of finding and securing a contractor to perform the renovation.

  1. Apply for the loan with a reputable lender
  2. Get approved
  3. Choose a contractor
  4. Get estimates and bids
  5. Close on the loan
  6. Complete repairs

How To Choose A Hard Money Lender

Finding the right hard money lender may seem hard, but it’s not. Use Google, reviews, client referrals, and word of mouth to find the best lender for you. It is important to do your research when looking for the right hard money lender.

Here are some things to look for when deciding which hard money lender is right for you.

  • Reputation. Check their online reviews and ask around to get feedback from their past clients.
  • Trustworthiness. Make sure they are licensed, bonded, and insured.
  • Speed. The best hard money lenders don’t have complicated approval processes and won’t make you wait for funds for a long period of time.
  • Flexibility. How do they look at you as a borrower and what do they consider collateral in order for them to grant you the loan.
  • Loan Rates and Terms. Shop for the best loan rates and terms that you can find.  Keep in mind, these can vary state by state.

Types of Hard Money Rehab Loans

There are two main types of hard money rehab loans to consider, the standard rehab loan and the streamline rehab loan. Learn more about the two different types of rehab loans below.

What’s the Difference Between a Hard Money Rehab Loan and an FHA 203(k) Loan?

When financing a property rehabilitation project, Hard Money rehab loans and FHA 203(k) loans are two popular options. One of the main differences between these two loan types is their intended use. FHA 203(k) loans are typically reserved for personal use, while Hard Money loans are for investing.

Another distinction between these loan types is the source of funding. FHA 203(k) loans are government-backed, while Hard Money loans can come from private lenders. The government sets specific guidelines for 203(k) loans, including credit score requirements. On the other hand, Hard Money loans account for the potential return on investment (ROI) of the property being financed.

Regarding the loan process, 203(k) loans can be more cumbersome and time-consuming to acquire than Hard Money loans. This is partially due to the government oversight and regulation in the application and approval process for 203(k) loans. Hard Money loans, on the other hand, may have more flexible eligibility criteria and a faster application process.

Standard Rehab Loan

A standard rehab loan is designed for more extensive property renovations and typically involves a larger loan amount (over $35,000). This type of loan can be a good option for investors looking to flip a property or homeowners who need extensive renovations to make their property livable. 

Standard rehab loans often require extensive underwriting, documentation, and a more thorough appraisal process, including hiring a U.S. Department of Housing and Urban Development (HUD) consultant.

Streamline Rehab Loan

On the other hand, a streamline rehab loan is designed for smaller-scale renovations and is a good option for borrowers who need a smaller loan amount or are completing smaller renovations. With a streamline rehab loan, home buyers or owners have a maximum of $35,000 for renovations. 

This type of loan typically has a more straightforward application and underwriting process, with fewer documentation requirements and a simpler appraisal process.

What Can a Rehab Loan Be Used For?

Rehab loans are a versatile financing option for many property renovation projects. Some projects rehab loans can cover include:

  • Repairs or changes that improve a home’s appearance
  • Installing or repairing a home’s roof and flooring
  • Fixing gutters and downspouts
  • Installing energy-efficient lighting and appliances
  • Revamping the plumbing and waste systems
  • Landscaping and groundwork
  • Addressing any health and safety hazards

Rehab loans can also be used to enhance a home’s accessibility or functionality, such as by adding wheelchair ramps or widening doorways.

It’s important to note that rehab loans are generally reserved for essential renovations that improve the property’s overall value and livability. Projects that are considered purely cosmetic or non-essential may not be eligible for funding with a rehab loan.

Rehab Loan Pros

Rehab loans offer several advantages for financing a fixer-upper property or renovation project. One benefit is that rehab loans often have more lenient requirements than conventional loans, meaning borrowers with lower credit scores may still qualify for a rehab loan.

Rehab loans can be used to purchase and renovate a fixer-upper property or to refinance an existing mortgage with the cost of renovations included in the loan. This can be a convenient option for those who want to finance the cost of home improvements without a separate loan.

Another advantage of rehab loans is the low down payment requirement, which makes it easier for borrowers to obtain financing for a property renovation project. Some rehab loans may require as little as 3.5% down, which is significantly less than the down payment for a conventional loan.

Rehab Loan Cons

While rehab loans can offer several advantages for financing a property renovation project, they also have their fair share of potential drawbacks. One disadvantage is that rehab loans typically require draws and inspections throughout the renovation process, meaning that the borrower must provide evidence of the work being done and may need to wait for approval and funding for each stage of the renovation.

Another potential disadvantage of rehab loans is that liability insurance is required for the duration of the loan. Liability insurance can add an extra expense to the renovation project because the borrower must maintain insurance coverage to protect against any accidents or damages that may occur during the renovation process.

Finally, there is often a time limit to complete the renovations with a rehab loan. The exact timeline can vary depending on the loan terms and lender requirements; however, borrowers typically have a set amount of time to complete the renovations and may face penalties or other consequences if the work is not completed within the allotted timeframe.

Contact The HardMoney Company

If you are looking for a trustworthy, well-funded, and insured hard money lender, then The HardMoney Company is here for you. We have loaned over 1 billion dollars for investment properties, and we have the quickest and most secure process for our clients. We take pride in the loyalty of our repeat customers. Our clients use our lending services over and over again because we are an excellent partner. Please give us a call or fill out our easy application online.