Like any real estate transaction, there are pros and cons to getting rehab financing. Whether you choose a conventional rehab loan or an FHA 203k rehab loan will depend on the property you are purchasing and other factors. By understanding what you need to know before getting a 203k loan, you will be able to make the right choice between FHA and conventional financing. Which option you choose can affect your mortgage interest rate, terms, and the total you will pay over the life of the loan, so knowledge of your options—and choosing wisely—is important.
What is a Rehab Loan?
Home rehab loans are designed to give home buyers the opportunity to purchase a home and have rehab work completed on it—all with the same loan. Unlike a mortgage, which is for a percentage of the cost of the home, rehab home loans like the 203k loan and other options are for the home’s purchase price plus additional money to rehab the home. The rehab that will be completed must be significant enough to bring the value of the home up to the loan amount or higher, or the chances of getting the loan are very low. A bank or other lender does not want to lose money or lend on a house that is not going to be worth the amount of the mortgage. This can make a rehab loan more difficult to get, but obtaining this type of loan is certainly possible.
The FHA Rehab Loan
One of the big advantages to the FHA rehab loan is that you are not going to be spending all of your savings trying to fix up a house that needs repair. Some banks and other lenders will not even offer a mortgage on a house that needs a lot of work, if the house is not livable in its current condition. If you want to get a mortgage and do not want to miss out on a great house, a 203k rehab loan can be the way to go. You will keep your savings in the bank, and still be able to do the work you want and need to have done on your house.
The FHA also generally offers a lower interest rate than other lenders that offer rehab loans, so you will have the opportunity to get a good loan at a price you can afford. You may be able to buy a very low-cost house and then put in the work to make it into a wonderful place to live. A lot of lenders will not work with you on that type of loan, because they are concerned about the financial risk involved and the lower value of the home. With an FHA loan, though, you have a much higher chance of being approved, and that can get you the money you need to start working on a “fixer-upper” house that will be worth much more than the original purchase price when it is completed.
How to Get a Rehab Loan
Rehab mortgage loans are offered by several different lenders, but not all of those lenders work with FHA loans. You want to choose a company you can trust, and one that routinely handles rehab mortgage financing through the FHA. With a 203K rehab loan from Prospect Mortgage, for example, it is possible to find a great house that needs work, and make it into your next home for the right price. When you plan to get a rehab loan and the cost of the rehab will be more than $35,000, you will need to have a plan before you can get accepted.
You will need contractors to do the work, and a bid will need to be submitted to the bank. Choose your contractor carefully. Once approved for the loan and the work has begun, you cannot easily change contractors or your plans for the home. With careful planning a rehab loan can be the perfect way to get a wonderful house at a good price.
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