A rehab loan, also known as a conventional rehab loan, is a type of mortgage that is designed to help homebuyers purchase and repair homes that are in need of major renovations. In this post, we will explore what a rehab loan is, how it works, and the pros and cons of choosing this type of mortgage.
What is a Rehab Loan?
A rehab loan is a type of mortgage that is designed to help homebuyers purchase homes that are in need of major renovations. These loans are also known as conventional rehab loans, FHA 203(k) loans, or Fannie Mae HomeStyle loans.
Rehab loans are different from traditional mortgages in that they allow borrowers to finance both the purchase of the home and the cost of repairs or renovations. This can be a significant advantage for homebuyers who are looking to purchase a home that needs major repairs or renovations.
How Does a Rehab Loan Work?
Rehab loans work differently than traditional mortgages. When you take out a rehab loan, the lender will typically provide you with the funds to purchase the home and the funds to complete the necessary repairs or renovations.
The amount of money you can borrow for a rehab loan will depend on the lender and the cost of the home and renovations. Some lenders may require a down payment, while others may offer 100% financing.
Once you have received the funds for the rehab loan, the repairs or renovations can begin. The work must be completed by a licensed contractor, and the lender may require inspections throughout the process to ensure that the work is being completed to a high standard.
Once the repairs or renovations are complete, the home will be appraised to determine its new value. The lender will then provide you with a loan based on the new appraised value of the home.
Pros of Choosing a Rehab Loan
There are several benefits to choosing a rehab loan over a traditional mortgage. One of the main benefits is that rehab loans allow you to purchase homes that are in need of major repairs or renovations. This can be a significant advantage for homebuyers who are looking for a fixer-upper.
Another benefit of a rehab loan is that it can be a good option for borrowers who may not have enough money saved for a down payment and the cost of repairs or renovations. With a rehab loan, you can finance both the purchase of the home and the cost of repairs or renovations.
In addition, rehab loans offer competitive interest rates. Because these loans are secured by the home, lenders may be willing to offer lower interest rates than they would for other types of loans.
Cons of Choosing a Rehab Loan
While there are benefits to choosing a rehab loan, there are also some drawbacks that borrowers should be aware of. One of the main drawbacks is that rehab loans can be more complicated than traditional mortgages. Because these loans involve both the purchase of the home and the cost of repairs or renovations, there may be additional paperwork and requirements that you must meet.
Another drawback of a rehab loan is that the repairs or renovations must be completed by a licensed contractor. This means that you may not be able to complete the work yourself or hire a friend or family member to do the work.
Rehab loans can also take longer to process than traditional mortgages. Because these loans involve both the purchase of the home and the cost of repairs or renovations, there may be additional inspections and appraisals that must be completed before the loan can be approved.
Conclusion
A rehab loan, also known as a conventional rehab loan, is a type of mortgage that is designed to help homebuyers purchase and repair homes that are in need of major renovations. While there are benefits to choosing a rehab loan, such as the ability to purchase a home that needs major repairs or renovations and competitive interest rates, there are also drawbacks, such as additional paperwork and requirements and the need to hire a licensed contractor. Before choosing a rehab loan, it is important to carefully consider your financial situation and to understand the terms of the loan.
