If you want to buy a home that’s in need of repair but you can’t afford the repairs costs, a rehab loan might be the perfect loan product for you.
According to Devin Quinn of Evergreen Home Loans, rehab loans are very popular right now. Limited inventory is causing a bit of a problem in today’s market. Many homes have financing problems because of their roofs, plumbing systems, electrical systems, etc., and sellers don’t have the money to fix those issues before closing.
These kinds of homes can’t be sold to normal buyers because they don’t have the money to take care of those issues, and a rehab loan addresses that problem. If the home you’re interested in buying has a failed roof, for example, a rehab loan allows you to buy that house, finance the cost of the roof repair in the loan, get the loan closed, and fix the roof after the closing.
From a qualification standpoint, the pre-approval process for a rehab loan is almost identical to a normal loan product. If you’re already pre-approved for an FHA or conventional loan, you’ll likely qualify for a rehab loan too.
There are two rehab loan products: the FHA 203k loan and the conventional rehab loan. The main difference between them is if you’re doing a conventional rehab loan, you need to put down a minimum of 5%.
To use a rehab loan, you have to be approved for the total dollar amount of the home buying project, meaning both the amount you’re buying the house for and the total cost of repairs. If you’re looking to buy a $300,000 house with $20,000 worth of upgrades, you need to be approved for $320,000.
Most rehab loan products will address issues that need to be fixed in order to close the loan or items that will add value to the home. This means you can finance the cost to renovate a kitchen, bathroom, or the flooring, but not for luxury items like pools. The coordination and completion of the work involved in a rehab loan will depend on the team behind it, meaning the lender, the buyer, and the contractor. Once the process gets more intricate and you have to pick out items like countertops and cabinets, you’ll have to be prepared to work with the contractor.
One of the biggest misconceptions surrounding rehab loans is the cost involved. Interest rates will vary from lender to lender, but on average, interest rates for rehab loans will be slightly higher than other loans, but not by much.
“Remember,” Devin says, “a lot of times you’re walking into some good equity with these properties, so a slight bump in rates is not a big deal.”
Whether you’re looking for a fixer-upper right out of the gate or you run into issues during the inspection of a home, a rehab loan is a great option, especially in our low-inventory market. Using one means you can look at a whole slew of other properties that normally wouldn’t be available to you.
I want to thank Devin for joining me today. If you have any more questions about rehab loans or you’re thinking of buying or selling a house in our market, don’t hesitate to reach out to me. I’d be happy to help you.
You can reach Devin Quinn at firstname.lastname@example.org or 253-278-9192