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Rehab Mortgage Loans

Are you thinking about purchasing a "fixer upper?" If so, you might need to obtain a rehab mortgage loan. These special loans are meant for people that are interested in purchasing a home that needs minor repairs before it can be occupied. Some people choose to use these types of loans in order to purchase a home so they can fix it up and resell it for a profit. Others use these loans in order to purchase a home at a lower cost so they can fix it up and continue living in it. Others fix them up and then rent them out. Regardless of your intentions, this type of loan allows you to borrow the money you need to purchase the house as well as money you need to make the necessary repairs.

Qualifying for a Rehab Mortgage

There are several criteria that must be met in order for you to qualify for a rehab mortgage loan. These basic criteria include:

  • At least three-quarters of the walls must be structurally sound
  • The home must be for one to four families
  • The home cannot be a mobile home or condo
  • The repairs must be able to meet the lender's limits

In order to determine how much you will need to borrow with your rehab mortgage, you will need to estimate how much it will cost for you to make repairs to the home. It is best to consider unexpected costs as well. That way, you can be certain you will have enough money to purchase the home and make the necessary repairs. At the same time, you need to make sure you aren't taking out too much money. Otherwise, you may take a loss when you sell the home.

Determining How Much to Take Out

The most difficult part of taking out a rehab mortgage loan is determining how much you should borrow. Many experts suggest finding out how much other homes in the area have sold for and then averaging that amount and multiplying your answer by 65%. Then, subtract the amount of money you estimate it will take to make the necessary repairs. When determining how much the repairs will cost, round up so you will have a little extra money if you need it. Experts suggest that you never take out more than 65% minus the repair costs. This way, you will have a little extra cushion if the price of the home should decline.

Types of Rehab Loans

There are different types of rehab mortgage loans for you to select from, though the most popular is the FHA Section 203k loan. This is the most popular option because it offers low interest rates, but the downside is that you can only purchase a one-family home with this type of loan. In addition, you must live in the home for a pre-determined amount of time after acquiring one of these loans. There are other restrictions involved with these loans as well. For example, the home has to be more than one year old and you cannot rent the home out.

These types of loans generally come with 30 year terms and with 1.5% fees. In addition, there are several other fees that you will have to pay before you can get approved for one of these loans. These include:

  • Paying for up to five inspections
  • Paying for the title
  • Credit check fees
  • Appraisal fees
  • Closing costs

In order to get the loan, you will also likely need to make a list of the necessary renovations and provide an estimate of the costs and repairs to the lender.

If you would like to fix up a home, whether for resell or because you want to hang onto it for a while, contact FiveStarHomeMortgage. We will be happy to help you find the loan that is right for you.