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When an investor wants to buy a real estate property in poor condition, renovate it and then sell it for a profit, they require short-term money to purchase the property and renovate it promptly. Owing to restrictive property qualifications and excruciatingly long closing times, traditional mortgages make this challenging.
This is where rehab loans come into play. These loans serve to aid investors who do not have much cash and want to renovate several real estate properties at the same time. If you are a real estate investor, read on to find out about the main types of rehab loans you ought to know about.
Investment Property Line Of Credit (LOC)
If you are already an owner of a home, you can tap into that property’s equity to finance your renovation work on your new real estate property. An investment property line of credit works in a similar fashion to a home equity line of credit (HELOC). You can borrow a percentage of your home’s equity and keep on using it repeatedly as required.
Investment property lines of credit usually have lower interest rates than the other financing alternatives available. This is because the real estate property secures the former. On top of that, you have ample time to repay it (up to three decades). Investment property lines of credit are ideal for those investors who want a revolving LOC to buy and rehab real estate properties.
You need a small debt-to-income ratio, a good credit score and equity in the real estate property to ensure that you qualify for an investment property line of credit.
Permanent Rehab Federal Housing Administration (FHA) 203(k) Loans
The FHA 203(k) loan is an ideal financing option if you are looking to renovate and fix up a home for your own personal use or if you are planning on fixing up the real estate property and hanging onto it for a period. Instead of filing applications for several loans like a separate home renovation loan and a mortgage, with an FHA 203(k) loan, you purchase or refinance a home that requires repair work and roll the expenditures of the renovation work into your mortgage payments.
Home improvement loans have short repayment terms and exorbitantly high interest rates. In stark contrast, the FHA insured 203(k) loans offer longer repayment terms and lower interest rates.
The home’s rehabilitation cost should be at minimum $5,000 for you to avail of these FHA 203(k) loans. Moreover, the total value of the real estate property must also be less than or equal to the Federal Housing Administration mortgage limit for your location.
You must work with a lender approved by the FHA to apply for this loan. The plus point is that there is no income requirement that you need to qualify for, but you must have a credit score of 580 or above to be eligible for an FHA 203(k) loan.
Hard Money Rehab Loan
You can go for the hard money rehab loan if you are struggling to find financial assistance. In contrast to conventional lenders, which look at your income and credit score before deciding whether to approve you for the loan or not, hard money lenders tend to base their final decision on what sort of collateral you can provide. If your credit score is less than satisfactory but you have real estate property (that is of considerable value) to serve as collateral, a hard money lender will be more inclined to work with you.
Hard money lenders will look at the real estate property’s after repair value (ARP) when determining the amount of your loan. Hard money lenders may loan you up to 75% of the property’s after repair value.
The rates tend to differ from lender to lender. Compared to other financing options, hard money rehab loans have shorter repayment terms and higher interest rates. However, they disburse these loans quickly, and you could get the money in a mere couple of days.
What Makes You Qualify For A Rehab Loan?
With the exception of hard money rehab loans, lenders will typically expect you to fulfill the following requirements in order to qualify for a rehab loan.
• You should have a credit score of at least 580 if you are applying for an FHA 203(k) loan.
• You should have a stable income.
• Lenders also look for borrowers who have prior real estate experience. In other words, you should have flipped a few estate properties on the market and generated a profit.
Many lenders and organizations, including online lenders and reputed banks that specialize in investor loans, offer rehab loans.
Bottom Line
Rehab loans can help investors with fixing up and flipping real estate and purchasing rental properties that require little work to restore them to their original condition.
The prime advantage of rehab loans is that they offer investors the option of a short-term loan swiftly approved, and facilitate both the renovation financing and the purchase of a house in a single loan.