Understanding Rehab Loans for Single Family Homes
Rehabilitation loans, often referred to as rehab loans, are mortgage products designed to finance the purchase and renovation of single-family and multi-family homes (2-4 units). These loans provide homebuyers with the opportunity to purchase properties in need of repair or renovation, and cover both the purchase price and the costs associated with fixing or upgrading the property. We will provide a comprehensive overview of rehab loans for single-family and multi-family homes, including their benefits, types, eligibility requirements, and application process.
Benefits of Rehab Loans
- Affordable Purchase: Rehab loans allow homebuyers to purchase properties at a lower price since the value of the home is assessed based on its current condition. This can be an attractive option in competitive real estate markets.
- Renovation Financing: Traditional mortgages often do not cover renovation costs. With a rehab loan, buyers can access funds to improve the property, increasing its value and customizing it to their needs.
- More Housing Inventory: When inventory of high quality existing and new homes is low, buyers can purchase properties that need some work and renovate them so that they end up with a beautiful home.
- Create Equity: If done properly, buying a more affordable home and spending money on the materials and labor to rehab it often creates equity in the property that is well above the initial investment.
Types of Rehab Loans
- Lakeside Bank Rehab Loans: Lakeside offers a Two Step loan that is easy to do:
STEP ONE: Short Term Line of Credit for Rehab
- Financing during Rehab Period
- Term of 12, 18 or 24 Months
- Advance 70-75% of Project Costs
- Prime plus 1% Interest Only
- Similar for new construction loans
STEP TWO: Refinance with Term Mortgage
- Refinance into Term Mortgage
- Fixed Rate and ARM Options
- Competitive Rates & Potential for Cashout
- No Cost Refinance Available
- Lakeside Bank Executes Rehab & Term Loan
Rehab Line of Credit Additional Details:
- Project Costs: Finance property purchase, labor, materials and soft costs (architectural plans, permits, etc)
- Interest Rate Reserve: No interest paid during the rehab period—Added in the loan amount
- Draws: Monthly draws through construction escrow
- Property Types: Single Family, Multi-Unit, Mixed Use & Commercial
- Fees: 1% origination fee plus $895-$1,895 document fee
- FHA 203(k) Loan: Backed by the Federal Housing Administration (FHA), this rehab loan offers two options – the Standard 203(k) for major renovations and the Limited 203(k) for minor upgrades. These loans have a significant amount of paperwork and have higher fees and rates compared to Step Two of the Lakeside Rehab Loans. The documentation for the contractor is extensive and most contractors do not like to work with this loan. For the reasons above, Lakeside Bank does not offer these products.
- Fannie Mae HomeStyle Renovation Loan: Offered by Fannie Mae, this conventional loan allows borrowers to finance both the purchase and renovation of the home. It is available for primary residences, second homes, and investment properties. These loans have a significant amount of paperwork and have higher fees and rates compared to Step Two of the Lakeside Rehab Loans. The documentation for the contractor is extensive and most contractors do not like to work with this loan. For the reasons listed above, Lakeside Bank does not offer these products.
- Credit Score: Lenders typically require a minimum credit score, usually around 620 or higher, to qualify for rehab loans.
- Down Payment: Borrowers are usually required to make a down payment, which can range from 3.5% for FHA 203(k) loans to 25% for the Lakeside Bank rehab loan.
- Income and Debt-to-Income Ratio: Lenders will assess your income and debt-to-income ratio to ensure you can afford the loan payments.
- Project Scope: The proposed renovation project must meet the lender's guidelines and should add value to the property. It is important to have a well thought out project scope well in advance of putting an offer on the property.
- Experienced Contractor: Most of the bank’s risk in the loan is if the contractor cannot complete the project on time or does not do the work correctly. Your contractor needs to have a good track record of completing similar projects on time.
The Application Process
- Pre-Approval: Start by obtaining pre-approval from a lender. This will give you an idea of how much you can borrow and help you set a budget for your home purchase and renovation.
- Schedule a Consultation: It is critical that you discuss your objectives and goals with your Lakeside banker well in advance of finding a property so that everything is lined up.
- Find a Property: Look for a single-family or multi-family home that requires renovation and fits within your budget.
- Get Contractor Bids: Obtain detailed estimates from your licensed contractor for the renovation work you plan to undertake.
- Complete Loan Application: Submit a formal loan application, including details about the property, your finances, and the proposed renovation plans.
- Loan Processing: The lender will review your application, verify the information, and assess the feasibility of the renovation project.
- Loan Approval and Closing: Once your loan is approved, you'll close on the property and receive the funds to purchase the home and start the renovation.
Rehab loans for single-family and multi-family homes offer a practical and accessible way for homebuyers to purchase properties in need of renovation. By combining the costs of purchase and renovation into a single loan, these financing options make it easier for buyers to achieve their dream of homeownership while customizing their homes to meet their specific needs. However, it's crucial to carefully assess the scope of the project and work with experienced professionals to ensure a successful and rewarding renovation experience.
If you cannot find it, BUILD IT! With Lakeside Bank’s Rehab Loan, you can build your DREAM HOME! Lakeside Bank Provides ONE Solution for Your Rehab Needs.
*** Final terms determined by multiple factors including but not limited to property type, expected usage, credit profile, debt service, guarantor strength, expected property performance, and net worth. This is not an offer to extend credit. ***