Best Three Rehab Loan Options for Investors in Real Estate

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Rehab Loan Options for Investors in Real Estate

When an investor wants to buy an immovable property in poor condition, renovate it and then sell it for a profit, they need short-term money to buy the property and promptly renovate it. This is made challenging by traditional mortgages, due to restrictive property qualifications and appallingly long closing times.

It is here that recovery loans come into play. These loans serve to assist investors who don’t have much cash and want to simultaneously renovate several real estate properties. If you are an investor in real estate, read on to find out about the main types of rehab loans you should be aware of.

Investment Property Line Of Credit (LOC)

If you already own a home, you can tap into the equity of that property to fund your renovation work on your new property. An investment property line of credit works in a similar manner to a credit line for home equity (HELOC). You can borrow a percentage of your home’s equity, and continue to use it as required repeatedly.

Credit lines for investment property typically have lower interest rates than the other available financing alternatives. This is because the former is covered by real estate. Besides, you have plenty of time to repay it (up to 3 decades). Credit lines for investment properties are ideal for investors who want a revolving LOC to purchase and rehabilitate real estate properties.

You need a small debt-to-income ratio, a good credit score and real estate property equity to ensure you qualify for an investment property line of credit.

Permanent Rehab Federal Housing Administration (FHA) 203(k) Loans

The FHA 203(k) loan is an ideal financing option if you want to renovate and set up a home for your own personal use or if you plan to fix and hang on the property for a period of time. Instead of filing applications for multiple loans, such as a separate home renovation loan and a mortgage, using an FHA 203(k) loan you buy or refinance a home that requires repair work and roll the renovation work expenses into your mortgage payments.

Home improvement loans have exorbitantly high interest rates and short repayment terms. The FHA insured 203(k) loans, in stark contrast, offer longer terms of repayment and lower interest rates.

The rehabilitation cost of the home should be at least $5,000 for you to take advantage of those 203(k) FHA loans. In addition, the total value of immovable property must also be less than or equal to the location’s Federal Housing Administration mortgage cap.

To apply for this loan you must work with a lender approved by the FHA. The plus point is that there is no income requirement to qualify for, but to be eligible for an FHA 203(k) loan you must have a credit score of 580 or higher.

Hard Money Rehab Loan

If you are struggling to find financial assistance you can go for the hard money rehab loan. Unlike conventional lenders, who look at your earnings and credit ratings before determining whether or not to accept you for the loan, hard money lenders tend to base their final decision on what kind of leverage you can provide. If your credit score is less than satisfactory but you have property (which is of considerable value) to serve as collateral, a lender of hard money will be more likely to work with you.

When determining the amount of your loan, hard money lenders will look at the real estate’s after repair value (ARP). After repair value, hard money lenders can lend you up to 75 percent of the property.

Typically the rates vary from lender to lender. Hard money rehab loans have shorter repayment terms and higher interest rates compared with other financing options. They are quickly disbursing these loans, though, and you could get the money in just a few days.

What Makes You Qualify For A Rehab Loan?

With the exception of rehab loans with hard money, lenders typically expect you to meet the following requirements to qualify for a rehab loan.

  • If you are applying for an FHA 203(k) loan you should have a credit score of at least 580.
  • You should have steady income.
  • The lenders are also looking for borrowers with prior experience in real estate. In other words, you ought to have flipped on the market a few assets and made a profit.

Many lenders and organizations offer rehab loans, including online lenders and reputable banks which specialize in investor loans.

Bottom Line

Rehab loans will help developers repair and sell real estate and purchase rental property that needs little effort to return it to its original condition.

The primary advantage of rehab loans is that they offer investors the option of a swiftly approved short-term loan, and facilitate both the financing of renovations and the purchase of a single loan house.