Rehab Loan
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Rehab loans provide fixed-rate financing for the purpose of purchasing and rehabilitating homes, or for refinancing and improving current homes. Whether the consumer is purchasing a "fixer upper" or refinancing the current home, the costs of repairs are included in the rehab loan. Lenders who offer only conventional lending programs will approve mortgages only for the amount of the house as it currently exists, but a rehabilitation program takes into account a house's potential worth.
The U.S. Department of Housing and Urban Development (HUD) created the 203(k) rehab loan program in response to the catch-22 of people affording only fixer-uppers but, after making the down payment, having no money to do the actual repairs. Rehab loans are available through approved lenders, and HUD has representatives available to answer questions and help with estimating renovation costs and completing paperwork. These programs typically require more paperwork than conventional loans, take longer to approve, and require higher interest rates and closing costs. In spite of these drawbacks, however, this may be an excellent financing option, especially for a first-time home buyer or someone with little cash for a down payment.
In order to qualify, properties must have been residences for a set number of years prior to the rehabilitation date. This means, for example, the consumer cannot take out a rehab loan to turn a warehouse into living space. Properties can be single-family residences or two- to four-unit dwellings. Almost any kind of repair qualifies, provided the total cost of improvements is at least one-third of the original price of the home. So, repairs such as modernizing, affixing permanent decorations, and adding rooms will likely qualify for rehab loans.
The loan includes the amount paid to the seller and the amount anticipated for renovations. The rehabilitation portion is placed in an escrow account, which can be drawn from in up to five increments. It is extremely important that the initial cost estimates of the rehabilitation efforts be accurate because the amount of rehab loans cannot be increased after the fact. Whether the home buyer does the work himself (or herself) or a contractor is hired, the estimate must be accurate and the work must be completed in a timely manner.
This rehabilitation program is a creative means of neighborhood revitalization and a way to encourage home ownership among people who may not otherwise be able to afford a house. Home ownership helps to strengthen families and provides stability and pride to communities. If the consumer has questions about a rehab loan, they can speak with a local mortgage lender about a 203(k) program. "Except the LORD build the house, they labour in vain that build it," (Psalm 127:1)
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