Conventional Rehab Loan – All You Need To Know

The Wendy Thompson Team makes obtaining the funds you require simple.

You’ll need a down payment of about 5% to get started.

Some lenders need a larger down payment, so you may need to put down as much as 20%.

You’ll also need excellent or excellent credit. Expect lenders to look at your credit history and credit score, even if it isn’t perfect.

Be prepared to explain and verify that you’ve overcome any unfavorable credit occurrences, such as bankruptcy or foreclosure.

Lenders evaluate your monthly income to your monthly bills using the debt-to-income (DTI) ratio.

It all boils down to the fact that lenders want to know if you’ll be able to make the payments.

If you can show that you have the income, that your debts are manageable, and that you have the money saved to handle the installments and the down payment, you’ll be well on your way to meeting the conventional rehab loan requirements.

Simple and straightforward.

FHA 203(k) Loans vs. Conventional Rehab Loans – Pros & Cons

FHA 203(k) Loan

There’s also the issue of interest to consider: most other financing choices have substantially higher interest rates. This loan is backed and insured by the Federal Housing Administration (FHA) and is offered by the United States Department of Housing and Urban Development (HUD). While only approved lenders, such as Contour Mortgage, are permitted to offer them, they do have slightly more forgiving terms than conventional mortgages.

A large return on investment (ROI) owing to value-added enhancements, as well as a 3.5 percent down payment, are possible benefits.

This loan covers the purchase and maintenance of the property in order to assist borrowers in obtaining a fixed- or adjustable-rate mortgage.

As previously stated, this loan has two options, which are explained below:

Limited 203(k): The FHA, which is mostly for non-structural work, allows borrowers to borrow up to $35,000 for repairs, improvements, and upgrades. This loan is ideal for cosmetic improvements including flooring, appliances, plumbing, and electrical work, as well as kitchen and bathroom renovations. Total costs are capped at a certain amount depending on your location.

Standard 203(k): The higher loan limits are designed for more expensive rehabilitation projects and are used for structural work aimed at repairing fire or flood damage caused by hurricanes and other natural disasters.

PROS 

• You could profit in the long run: Upgrades and repairs boost the value of fixer-uppers, resulting in a large return on investment (ROI). If the house requires extensive renovations, you may be able to negotiate a reduced purchase price depending on your area.
• You can personalize your new home: A limited 203(k) loan funds non-structural, value-added improvements to make the house your own. Paint colors, flooring, cabinetry, countertops, and other cosmetic changes are among them.
• Its easier to qualify for: 203(k) loans, which are available via the FHA, have fewer limitations in terms of credit histories and scores, loan ceilings, and debt-to-income (DTI) ratios. While the FHA does not give cash directly to buyers, it does cover loans made by certified lenders like Contour Mortgage.
• You only require a down payment of 3.5%: Aside from the other conditions, 203(k) loans have lower down payments than conventional loans. You can get your ideal house by paying only 3.5 percent of the selling price at closing. You’ll also have extra money to spend on furnishings, moving costs, and other necessities.
• You won’t have to spend large funds at once: You won’t be allocating a significant sum of money all at once because you’ll be using loan funds to renovate your new or existing property. Instead, you can simplify your monthly payments until you’ve paid off the debt.

CONS

• There is a limit to the number of units you can buy in a house: 203(k) mortgages allow buyers to acquire multi-family homes as long as the property has no more than four units.
• Only a limited number of improvements are covered: Prior to approval, all repairs and improvements must be described and itemized. A respectable lender will ensure that you have the most up-to-date and accurate information possible. It’s also a good idea to double-check coverage items and dollar levels.
• It’s not the best option for borrowers looking for a turnkey property: While some people enjoy renovating and customizing their homes, others prefer to buy a ready-to-move-in home. Other lending choices would assist buyers who aren’t interested in making substantial renovations to their next property.

Conventional Rehab Loans

While FHA 203(k) loans are a realistic choice for consumers looking for a rehab loan, conventional solutions are also available. Fannie Mae’s HomeStyle Renovation Mortgage is available, while Freddie Mac’s CHOICERenovation loan is available.

Fannie Mae Homestyle: 

This flexible loan, which is available in both fixed and adjustable-rate options, helps borrowers make changes and modifications to their homes using a primary mortgage rather than other more expensive means. It’s also possible to combine it with other Fannie Mae goods.

“Renovation costs may be approved up to the lesser of 75 percent of the purchase price plus renovation costs or the as-completed appraised value, and competitive rates that may be lower than a home equity line of credit (HELOC), personal loans, or credit cards,” according to the HomeStyle Renovation Mortgages: Loan and Borrower Eligibility requirements.

PROS

• There are both fixed and ARM options available: Choose the one that best meets your requirements. For a conventional main mortgage, the initial principal cannot exceed the association’s maximum mortgage amount.
• Other Fannie Mae products can be bundled with this loan: Borrowers can combine their renovation loan with one of Fannie Mae’s other programs, such as HomePath or RefiNow.

CONS

• Complete teardowns and rebuilds are not permitted: A total deconstruction or foundation reconstruction will not be covered by this loan.
• There will be more paperwork to fill out: You’ll need to provide additional documents, such as a work plan, standard renovation loan agreement, consumer renovation information, and others because this is a customized loan.
• Renovations must be finished within a certain period of time: All work must be completed within 12 months of the deadline.

Freddie Mac CHOICERenovation: CHOICERenovation, unlike FHA 203(k) loans, can be used for multi-unit dwellings, second homes, or investment properties. There’s also a 3.5 percent down payment, as well as lower credit scores and debt-to-income ratios (DTI). Certain restrictions may apply based on your region if you choose a 15- or 30-year term.

PROS

• Credit scores and lower down payment are both acceptable: Lenders will accept a down payment as low as 3.5 percent and poorer credit scores, similar to the FHA 203(k) and Fannie Mae HomeStyle loans.
• It isn’t limited to single-family residences: This loan is appropriate for rental houses, second homes, and other multi-family dwellings. Certain restrictions will apply depending on the area.

CONS

• Properties owned by banks may require additional approvals: If you’re looking for houses at auction or in foreclosure, you should allow extra time for the approval process.
• You are not permitted to have any ties to any of the parties engaged in the loan transaction: Borrowers cannot do business with, or be related to, the builder, developer, or seller of the home.

How Does A Conventional Renovation Loan Work?

Wrapping your rehab fees into your mortgage with a rehab loan isn’t as complicated as it sounds.

The following is how it works:

You put down a deposit. Lenders may require a minimum deposit, however, keep in mind that the more you put down, the better your conditions will be. Depending on your situation, some lenders want a down payment of 10% to 20%.

Your lender and contractor will collaborate on your project. The contractor creates work plans, which you will submit to the lender. Normally, lenders have little influence in what you do with the property. They’re curious since you’re paying for the repairs. The lender must ensure that the renovations will increase the value of the home.

The house will be appraised by an appraiser. Lenders calculate your loan amount based on the property’s projected after-repair worth. The contractor’s plans will be used by an appraiser to estimate the potential worth.

You must submit all required documentation. Lenders have the right to demand verification of income, assets, and credit history. Although you can get pre-approved, the loan procedure can take 60 to 90 days to complete due to the numerous moving parts.

It’s possible that you’ll need private mortgage insurance. You’ll have to pay private mortgage insurance if you put down less than 20% on a home (PMI). The amount depends on the size of your down payment, the value of your property, and your credit score.

Within six months, all work must be completed. If you require more time, you may be granted up to one year, but you must first obtain lender approval.

Work on the house does not begin until the loan is closed. Like a normal transaction, the lender pays the seller and places the remaining monies in escrow. The lender will distribute the funds in accordance with the schedule agreed upon with the contractor and after each completed phase has been inspected.

Is a Conventional Rehab Loan Right for Me?

Here’s the major question to consider while deciding between a rehab loan and a conventional loan:

When is a conventional rehab loan appropriate?

If you locate a house that needs maintenance but don’t want to deplete your resources or take out another loan to patch it up, a rehab loan could be the ideal option.

It’s a terrific approach to save your money so you can use it for other things.

Borrowers who don’t want to make repeated installments will appreciate it.

Here’s what I’m talking about:

Multiple payments might be difficult to manage if you take out a second mortgage, charge a credit card, or receive an unsecured personal loan.

There’s also interest to consider: most other types of financing have substantially higher interest rates than a rehab loan.