What Constitutes a Rehab Loan?

The FHA construction loan is also known as a rehab loan. It can be used to finance the purchase of a home that needs some work or renovation. It is actually a mortgage that can be used to purchase the home or make structural improvements. FHA 203k loans are the most popular type of rehab loan. The Federal Housing Authority backs these loans to ensure that the strategies and credibility are reliable and on point for buyers.

How does a rehabilitation loan work?

What is a rehabilitation loan?

As we have already mentioned, rehab loans are simply a technical term for an easy and simple mortgage. It is the same as any standard home loan. There are some important differences that you should be aware of. To make a rehab loan work, you must follow guidelines provided by HUD.

The Preparation

If you follow the right guidelines, applying for a loan will be a breeze. Find the house you wish to renovate in the area. Speak to a licensed professional and get an accurate estimate of the required work. The work includes materials, labor and any other overheads required for the project. You need to get approval again for FHA-203k even if you already have it. You can ask a banker or finance professional to do this for you. The buyer will get bids from different contractors to find the best deal in the market. He/she will then close the loan with the contractor that he/she feels is the most suitable. The lender and buyer will receive a copy after the proposal.

The Application

FHA orders a home appraisal to determine the value of the house after renovation. In the underwriting process, a list of documents is provided, which includes all the relevant information about the contract. This includes the bid, the appraisal, the credit and asset disclosures and the income sources of the buyer. The underwriter approves the loan based on specific conditions. The first half of the loan will be released immediately, allowing for good equity to be available up front, while the remaining 50% will only release after completion of the project. The result is deemed to be completed in six months after the loan has been closed. The contractor receives the remainder of the contract amount and the buyer gets a single figure, with a discount rate, to pay in the future years.

How do you qualify for a rehab loan?

You are more likely to be eligible for FHA-203k if your previous FHA loan was approved. To be eligible for a rehabilitation loan, you must meet certain conditions. We’ll take a look at some of the requirements.