Rehab Loan: What It Is and How It Works

What is a Rehab Loan and How Does It Work

A Rehab Loan is essentially a mortgage but with an added component for renovation costs. This type of loan allows the borrower to finance both the purchase of the property and the cost of the renovations into a single loan. Instead of having to secure separate loans for the purchase and the renovation, a Rehab Loan wraps them both into one.

Here’s a Quick Rundown of How the Process Typically Works:

• Step 1: You identify a property that needs renovation and determine the cost of the property plus the estimated renovation cost.
• Step 2: You apply for the Rehab Loan, and upon approval, the amount is determined based on the projected value of the property after renovation.
• Step 3: The loan amount is used to purchase the property and the remaining fund is kept in an escrow account.
• Step 4: As the renovation progresses, the costs are paid out from the escrow account to the contractors.
• Step 5: Once the renovation is complete and the final payment has been made, the Rehab Loan functions like a standard mortgage.



Remember, while this process might seem more complex than a conventional mortgage, it provides a flexible and efficient way of turning a fixer-upper into a valuable property.

The Benefits of a Rehab Loan

The benefits of a Rehab Loan extend beyond its financial aspects, impacting various facets of property investment and renovation. Here are some key advantages worth considering:



• Financial Efficiency: A Rehab Loan consolidates the property purchase price and renovation costs into one, eliminating the need for multiple loans and simplifying the payment process.
• Potential for High Returns: The Rehab Loan enables you to purchase and renovate properties in prime locations that might otherwise be out of reach, potentially leading to significant returns on investment.
• Greater Buying Power: By incorporating the cost of renovation into the loan, you effectively increase your buying power and can consider properties that need significant work.
• Customization: A Rehab Loan allows you to customize a property to suit your needs or the preferences of potential renters, as you're not limited by the current state of the property.

Remember, while the benefits are numerous, it's essential to consider all factors and seek professional advice before taking out a Rehab Loan.

What You Need to Qualify for a Rehab Loan

To qualify for a Rehab Loan, you need to meet certain criteria:



• Credit Score: Borrowers typically need a credit score of at least 620. Higher scores may qualify you for better interest rates.
• Debt-to-Income Ratio: This ratio, which compares your monthly debt payments to your gross monthly income, should ideally be less than 43%.
• Down Payment: While the exact amount may vary based on the loan type and lender, a down payment of at least 3.5% is typically required.
• Property Approval: The property you're planning to purchase and renovate must be assessed and approved by a qualified appraiser.
• Contractor Approval: The contractor carrying out the renovations must also be approved by the lender, ensuring they have the necessary qualifications and experience.
• Detailed Rehab Plan: A detailed plan outlining the scope of the renovations, the timeline for completion, and the cost estimates must be submitted. This plan helps lenders determine the post-renovation value of the property.

The Costs Involved with a Rehab Loan

Similar to other types of loans, a Rehab Loan can have several associated costs that you should consider:

• Interest Rate: Rehab Loans typically have higher interest rates than conventional mortgages due to the increased risk associated with renovation projects.
• Loan Origination Fee: This is a charge by the lender for processing a new loan application, and it's usually a percentage of the total loan amount.
• Appraisal Fee: You'll need to pay for an appraisal to estimate the future value of the home after renovation.
• Inspection Fees: Inspection fees are often required to ensure the renovation work is on track and meets the predetermined standards.
• Closing Costs: These are fees and expenses you pay to finalize your mortgage, and they usually range from 2% to 5% of the loan amount.
• Mortgage Insurance: If your down payment is less than 20%, you may be required to pay for mortgage insurance.



It's important to factor these costs into your budget when considering a Rehab Loan to ensure you can comfortably afford the repayments and make the most of this financial tool.

Tips for Finding the Right Lender

When seeking a lender for a Rehab Loan, consider the following tips:



• Research: Start by conducting thorough research on potential lenders. Look for those with a solid reputation and a history of issuing Rehab Loans.
• Reviews: Take time to read online reviews and testimonials from previous customers. This can provide insight into the lender's customer service and reliability.
• Interest Rates: Compare the interest rates and terms offered by different lenders. The goal is to find the most favorable terms that fit within your budget.
• Terms and Conditions: Carefully review the lender's terms and conditions. Understanding these details can help you avoid unexpected charges or issues down the line.
• Professional Advice: Consider seeking advice from a financial advisor or real estate professional. They can provide valuable guidance in choosing a lender that meets your specific needs.

How to Apply for a Rehab Loan and Get Approved

• Step 1: Identify Your Property and Renovation Plan: Scan the market for a property that meets your requirements. Create a detailed renovation plan including costs and timeline.
• Step 2: Prepare Your Documentation: Gather all necessary documentation such as proof of income, credit reports, and a detailed renovation plan. This will speed up the application process.
• Step 3: Apply for the Loan: Submit your loan application to the lender.
• Step 4: Property Appraisal: The lender will arrange for an appraisal to determine the property's value after renovations.
• Step 5: Loan Approval: If all goes well, the lender will approve your loan. The loan amount will be based on the estimated value of the renovated property.
• Step 6: Renovation Begins: The renovation process begins, and the lender disburses the renovation portion of the loan as per the agreed schedule.
• Step 7: Loan Converts to a Mortgage: Once renovations are complete, the loan will convert into a conventional mortgage, with monthly repayments made over an agreed term.



Remember, the time taken to get a Rehab Loan approval can vary based on several factors, including the lender's backlog of applications, the completeness and accuracy of the applicant's documentation, and the complexity of the renovation plan.

About Us

Need help with procuring your hard money loan but don’t know where to go? If yes, then you have come to the right place. Structured Financing Solutions is the only loan brokerage company you need to connect with for all your real estate and business loans. We focus on helping our clients through the loan process every step of the way to make the entire process faster, smoother, and more cost-efficient. You can reach us at 404.836.3827 or fill out our contact form to know more.