Rehab Loan Financing

Rehab Loans Can Substitute the Down Payment with Physical Labor for Potential Home Buyers

Sometimes, the home you want to buy is not in good shape and that could potentially help you with buying a home with no money down. This down payment alternative is called a rehab loan that is issued by the Federal Housing Administration (FHA).

First thing, a potential buyer needs to do is to look for a property that needs some work done. When one is found, the buyer needs to contact and speak with a local lender and ask about in-house financing. It is important to bring a rehab plan, which is a proposal to rehabilitate the home.

The buyer should provide proof that if the lender finances the property for one year he or she can finish the necessary repairs. The renovations and repairs will ultimately raise the value of the property. Also, the lender needs proof that with these renovations the buyer still has enough equity to refinance the in-house loan to a secondary mortgage.

Using a rehab loan option, the buyer will receive complete financing with a potentially higher interest rate. That is a bit of a drawback, but the cost of completing the physical labor may still be less than what would be required for a down payment.

FHA Rehab Loans are designed to target the distressed first-time homebuyers or those in the lower-income brackets. These loans are secured with properties in need of rehabilitation and repairs.  It may seem simple, but qualifying for one of these loans can be rather difficult due to the tight restrictions.

When buyers are interested in this option, they need to confirm that they have an eligible property.  Properties that contact either one to four units and have been completely repaired for at least a year are the only properties used with rehab loans.  One must realize that these loans are not just construction loans. They are used to rehabilitate or repair the existing home and not construct a new one.

There are some restrictions on the reasons for a rehab loan. Some examples include meeting energy efficient standards and making improvements to major appliances like air condition units or heaters.

Along with the tight restrictions, the limitations are just as tight. Rehab loans can not be greater than either the existing mortgage on the home, the cost of the rehab and closing costs or the prior appraised home value added to the cost of the rehab.

It is important to know everything about rehab loans before pursuing the home rehab. A trusted lender can help a buyer in the rehab loan process. The housing market seems to be moving in the right direction for a homebuyer to purchase a first or second home.