Rehab loans can be a game-changer for investors and homeowners looking to purchase properties in need of renovation. These loans offer a way to finance both the purchase and the renovation costs, making it easier to acquire and improve properties. Today, we’ll explore different types of rehab loans, their benefits, and how you can qualify for them. We’ll also learn from Kyla Blasingame, an expert in renovation loans.
Meeting Kyla Blasingame
Kyla Blasingame has been in the real estate industry for six years and recently joined a company that specializes in renovation loans. Her expertise offers valuable insights into the various products available and how they can benefit different types of investors and homeowners.
What is a Rehab Loan?
A rehab loan is a type of mortgage that allows you to finance both the purchase of a property and its renovation costs. Unlike hard money loans, rehab loans are provided by traditional mortgage lenders and come with more favorable terms. This makes them a less intimidating option for new investors.
Types of Rehab Loans
There are three main types of rehab loans available: two FHA products and one conventional product.
FHA 203k Loans
- Streamline: This option caps the repair costs at $35,000 and is limited to cosmetic repairs.
- Full Consultant: There is no limit on repair costs, and this loan can cover both cosmetic and structural repairs. You can even use it to tear down and rebuild a property, as long as the foundation is in place.
Conventional Homestyle Loan
Homestyle loans are conventional rehab loans that offer more flexibility compared to FHA loans. They are suitable for investors who prefer conventional financing and can put down at least 20%. This option does not require mortgage insurance, making it an attractive choice for many.
Benefits of Rehab Loans
Lower Interest Rates
Rehab loans offer much lower interest rates compared to hard money loans. While hard money loans can range from 11% to 12%, rehab loans typically have rates between 5.5% and 6%.
Advantages Over Hard Money Loans
- Lower Points: Rehab loans have fewer points and better terms, making them ideal for new investors.
- More Options: These loans provide more flexibility, allowing you to tailor the financing to your specific needs.
FHA Loans: Streamline and Full Consultant
FHA 203k Streamline
This loan is perfect for minor repairs and cosmetic updates. It caps the repair costs at $35,000 and does not allow for structural changes.
FHA 203k Full Consultant
This option is for more extensive renovations. There is no limit on repair costs, and you can even rebuild a property from the ground up. This loan also covers structural repairs.
Owner-Occupied Requirement
Both FHA 203k loans require the property to be owner-occupied. This means the buyer must live in the property for a minimum of six months to a year after the renovation is complete.
Conventional Homestyle Loans
Introduction to Homestyle Loans
Homestyle loans are a conventional financing option for investors. They offer more flexibility compared to FHA loans and do not require mortgage insurance if you put down 20%.
Advantages for Investors
- No Mortgage Insurance: If you can put down 20%, you avoid the additional cost of mortgage insurance.
- Flexible Renovation Options: There is no cap on repair costs, allowing for more extensive renovations.
Comparing FHA and Homestyle Loans
Key Differences
- Owner-Occupied Requirements: FHA loans require the property to be owner-occupied, while Homestyle loans do not.
- Repair Limits: FHA Streamline has a cap of $35,000, whereas there are no limits with Homestyle or FHA Full Consultant loans.
- Mortgage Insurance: Homestyle loans do not require mortgage insurance with a 20% down payment, while FHA loans do.
The Renovation Process
Scope of Work
Defining the scope of work is crucial. Determine whether you need cosmetic or structural repairs and prepare a detailed plan.
Consultants and Contractors
Hire consultants to prepare bids and scope of work. Work with reputable contractors, but know that you can choose your own as long as there is no personal relationship.
Draw Process
The draw process varies by loan type. It involves releasing funds in stages, either upfront, in multiple draws, or at the end of the project.
Appraisals and Inspections
Appraisal Process
Appraisals for rehab loans are ‘subject to’ the completion of the planned repairs. This means the appraisal considers the value post-renovation.
Handling Low Appraisals
If the appraisal comes in low, you can flip to a renovation loan and include the repair costs in the mortgage.
Case Examples
Investor’s Property Needing Foundation Work
Imagine buying a property needing foundation repairs. A traditional loan might fall through, but a rehab loan can include these repair costs, allowing the purchase to go ahead.
Using a rehab loan for a primary home allows for major renovations like building a mother-in-law suite or a pool house, adding significant value to the property.
Approval Process
Standard Approval Process
You’ll need to provide standard documents like bank statements and W2s. The approval process considers debt-to-income ratio (DTI) and loan-to-value (LTV) requirements.
Additional Requirements for Rehab Loans
You’ll also need bids and a detailed scope of work to qualify for a rehab loan.
Contingencies and Budgeting
Contingency Funds
A contingency fund of 10% to 15% is included in the loan to cover unexpected issues. This ensures you have funds available for any surprises during the renovation.
Handling Overruns
If repair costs exceed the contingency fund, you may need to adjust the budget or add more contingency.
Project Completion
Project Timeline
The typical timeline for completing a rehab project is six months. This ensures that the project progresses efficiently without dragging on.
Final Inspections and Release of Funds
Once the project is complete, a final inspection is conducted. Remaining funds are then released to the contractor.
Legal and Compliance
Compliance with Loan Terms
Ensure you comply with all loan terms, such as the primary residence requirement for FHA loans. Avoid using family members as contractors to stay within the guidelines.
Common Questions About 203k Loans
Explanation of Terms
- DTI: Debt-to-Income Ratio, which measures your ability to manage monthly debt payments.
- LTV: Loan-to-Value Ratio, which compares the loan amount to the appraised value of the property.
Conclusion
Rehab loans offer a versatile and cost-effective way to finance property purchases and renovations. Whether you choose an FHA or a Homestyle loan, these products provide flexible options to meet your needs. For personalized advice, reach out to Kyla Blasingame or similar professionals who can guide you through the process.
For more information, contact Kyla Blasingame at Cardinal Financial. Don’t forget to subscribe to our channel for more real estate insights and tips.
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