What is a rehab loan, and what can you do with it? We’ll tell you everything you need to know in this comprehensive guide.

Do you know what’s more exciting than buying a turn-key home? Investing in a home you can fix and make your own. The challenge is finding the right type of loan for your next home-owning adventure.

Fortunately, there are private loans available for those who want a home they can fix and flip. Do you cringe at the mention of a private or hard money loan? Many people’s first thoughts are of shady businesses with high-interest rates.

The good news is you can find a rehab loan from a reputable bank. These types of loans give you the ability to buy a home with the flexibility to improve it!

But what exactly is a rehab loan and how does it work? Are there eligibility requirements to qualify?

Are you interested in securing a rehab loan for your next home improvement project? Here’s everything you need to know!

What Exactly Is the FHA 203(k) Rehab Loan?

The FHA 203(k) loan, affectionately known as a rehab loan, offers you the finances necessary to purchase and renovate a home. You can this same loan to refinance your existing home for a home improvement project, too!

This rehab loan is one of the most affordable ways to rehabilitate a home as you can pay the cost of the renovations over time. When you refinance or use this loan, you’ll be able to pay the renovations like you would a mortgage.

Reasons to use a rehab loan may include:

• Buying a home that needs major improvements and repairs
• Buying an outdated home but want to improve it
• Your existing home needs renovation
• You want to move your existing home to a new site

This type of loan packs several more great benefits. If you’re looking at homes in an area with a high cost of living, an FHA 203(k) loan can give you more housing options.

The other great benefit of this loan the Federal Housing Administration (FHA) insures these loans. This makes the qualifications to receive a loan more flexible and lenient. These loans typically, but not always, offer lower interest rates than other private loans or credit cards.

Not every home improvement project costs the same. The 203(k) rehab loan offers amounts as low as $5,000 and up to 110% of your property’s value. These amounts will vary depending on the FHA mortgage limits of your area.

How Home Rehab Loans Work

To put it simply, a rehab loan lets you purchase or refinance a home and put the costs of your renovation into the form of a loan. You then combine those costs with your mortgage to pay both off in the form of 1 monthly payment.

The process of acquiring the rehab loan is a little messier. A typical 203(k) loan process looks a lot like this:

1. You find a home you want to buy but it needs major repairs. Or, you want to renovate your current home
2. Find and apply with a mortgage lender who has an FHA-approval. You must have an idea as to what you’re fixing and the respective costs readily available. Not all lenders, however, offer FHA 203(k) loans
3. Find licensed contractors and have them draft bids for your project and repairs. The bids should go to both you and your mortgage lender
4. After receiving the bid, your lender will request an appraisal for the current and after-repair value of the house
5. The lender will underwrite the loan. They may request more details and documentation from you and the contractors
6. Your loan approves allowing you to sign any closing documents and receive the keys
7. The loan money will go to the home seller and another portion will go into an escrow account for home improvement costs
8. The home improvement project begins! The contractors start working and receive payment from the escrow account. The payout schedule depends on the type of 203(k) loan used
9. You move into your new home. A Limited 203 rehab loan requires you to move into your home 60 days from the initial purchase and start of the project. Standard rehab loans allow you to live outside the home until the renovation finishes

Like most lending processes, these steps can vary. Many factors such as location, home cost, project costs, and more may affect the steps and length of time it takes for you to receive the loan.

The Different Types of 203(k) Rehab Loans

Yes, there is more than 1 type of 203(k) rehab loan available. The 2 types include Limited 203(k) and the Standard 203(k) loans.

The Standard option is best for those tackling a larger, costlier, and more extensive home improvement project. The Limited 203(k) is a smaller loan that offers less financing making it faster to process.

The Standard 203(k) Renovation Loan

Since this type of rehab loan covers larger projects it has a higher minimum of $5,000. You’ll also need to hire a consultant approved by the Department of Home and Urban Development (HUD) to walk you through the process.

You’ll have the option to pick either a fixed- or variable- rate interest options. Borrowers can also choose the length of time to pay the loan off and the terms.

A Standard 203(k) loan will cover the following renovations:

• Structural improvements
• Storm shelters
• Heating, cooling, plumbing, and electrical improvements
• HVAC and appliance upgrades
• Septic and sewage improvements
• Roofing projects
• Landscaping
• Conversion from a single unit to a multi-unit property
• Site relocation
• Accessibility improvements

The FHA 203(k) loan includes a few other details. You’ll need a contingency reserve added to the loan to buffer any unexpected or increased costs of the project. This is usually around 10%-20% of the total project costs.

Before you can receive a 203(k) loan you must work with a HUD-approved consultant. These loans can be difficult to navigate and require more paperwork than your average hard money loan.

The property you’re purchasing or refinancing will need an inspection after completion of the repairs. You may live in the home during the renovations if you wish. If you prefer not to, you can finance the loan for up to 6 months if you prefer to live offsite.

The Limited 203(k) Renovation Loan

Is your home improvement project rather minor? If so, the Limited 203(k) rehab loan is the perfect solution. Since it’s smaller than the Standard, it’s faster to approve. You have the flexibility to take out a smaller loan up to $35,000.

This loan also gives you the option of fixed or variable interest rates. You’ll also have the ability to select terms and the length of the repayment plan.

Here’s a closer look at the projects a Limited 203(k) loan will cover:

• Indoor/outdoor painting
• Replacing or repairing flooring
• Roof, gutter, and downspout repairs
• HVAC, plumbing, and electrical repairs and replacements
• Small remodeling
• Appliance replacements
• Safe removal of lead paint
• Finishing/waterproofing a basement
• Deck and porch repairs or replacements
• Weatherization
• Accessibility improvements

Another perk of this type of loan is it doesn’t require a post-repair inspection if the remodeling costs are less than $15,000. You do have to live in the home during the renovation or move back in within 60 days of the project start.

Any major improvements like structural repairs or new construction will require the Standard 203(k) loan.

The Pros & Cons of a Rehab Loan

Rehab loans are a great way for you to widen your home buying options. You’ll have the ability to customize and finish your home exactly the way you want it.

Like with any loan, there are a few drawbacks as well. Here are the pros and cons of rehab loans to help you decide if one is right for you.

Rehab Loan Pros

There are many great benefits to a rehab loan. One such aspect is the ability to deduct the interest you pay while the improvement project is in full swing. Others include:

• Finance home and renovation in 1 loan
• Enjoy less competition and lower home prices
• Low payments
• Enjoy fixed or variable interest rates
• Refinance with a rehab loan

These are great benefits for anyone planning to live in their home even if it’s a fixer-upper.

Rehab Loan Cons

Before you decide to move forward with a rehab loan, you’ll need to consider the downsides. While these loans are a great option for most people, they’re not for everyone. A few cons of this loan include:

• Mortgage insurance required
• More paperwork
• Longer processing time
• Higher interest rates compared to other FHA loans
• Require appraisals
• Additional origination fees
• Only used on properties you plan to live in
• Only certain lenders can offer this loan

Overall, the cons of a rehab loan are relatively low. Most costs of the loan can balance out with the lower cost of a house if you choose to pursue a fixer-upper.

Yes! You Can Get a Loan for Your Fixer-Upper!

Are you shopping for a home in need of a renovation? Whether that project is large or small, a 203(k) rehab loan is the perfect loan solution to fit your needs.

Do you have questions or want to learn more? Let’s get in touch and we’ll help you find the right loan for your home-buying needs.