How Does a Rehab Loan Work? Explore Traditional and Non-Traditional Options

by HMLS

When it comes to rehab loans, your options are extensive and often overwhelming. Loans for rehabbing a property are offered by banks, credit unions, government agencies, and hard money lenders—all with different eligibility requirements and processing logistics. The structure of a rehab loan can also look quite different, depending on whether you’re a homeowner or a real estate investor. As a borrower, where do you start?

If getting a rehab loan sounds baffling, use our guide as a reference. We’ll help you make an informed borrowing decision by examining:

  • What traditional and non-traditional rehab loan options do you have
  • How to qualify for a rehab loan
  • What do the available alternatives to rehab financing look like

Rehab Loan—Meaning and Types

Most mortgage products allow you to borrow a loan-to-value (LTV) determined according to the current market value of the property. Say you find your dream home for $200,000. A basic housing loan would help you cover the purchase price—that’s mortgage 101.

Now picture this—what if your dream home is a bit of a tumbledown in need of repairs, requiring expenses worth $100,000 to make it livable? Even if you get a purchase mortgage, you may hesitate to exhaust your savings for the additional expenses or plainly do not have the funds to do so. That’s where rehab loans come in.

By definition, a rehab loan is a financing product used to secure funds greater than the current value of a real estate structure. The extra funds can be used for specified cosmetic and structural upgrades that are supposed to improve the overall appeal of the property.

Rehab loans can be broadly classified as traditional and non-traditional. Let’s take a quick look at the functionalities of both before exploring specific mortgage products.

Source: Dave Price

Traditional Rehab Loans

Traditional rehab loans refer to mortgages offered by banks, financial institutions, credit unions, and similar organizations that adhere to strict funding criteria. Traditional lenders approve loan requests based on the borrower’s ability to repay and typically ask them to comply with a fixed repayment plan (or an amortization schedule).

Traditional loans can further be categorized into conforming (conventional) and non-conforming (non-conventional) loans. Refer to the table below for more details:

Traditional Rehab LoanDescription
ConventionalConventional rehab loans are not insured or guaranteed by a government entity but are offered by lenders under Fannie Mae and Freddie Mac. There are two conventional rehab loan options:
Fannie Mae Homestyle Renovation
Freddie Mac CHOICERenovation
Non-conventionalA non-conventional rehab home loan is a government-insured mortgage loan backed by agencies like:
Federal Housing Administration (FHA)
Department of Veterans Affairs (VA)
United States Department of Agriculture (USDA)

Traditional rehab loans are generally devised to benefit homeowners (and not property investors)—the borrower gets low interest rates and long-term tenures, making it easier for them to repay. Regardless of the option you choose, these loans have a watertight screening process—you can expect a good amount of paperwork and a long wait time before you get approved and have access to funds, even if you’re sure you’ll qualify.

Non-Traditional Rehab Loans

Non-traditional rehab loans are offered beyond the shackles of traditional lending. They require lighter qualification paperwork and can be approved faster than traditional loans. Compared to traditional ones, non-traditional loans have medium to high interest rates and shorter tenures. The two popular non-traditional options for rehab financing are:

  1. Hard money loans—Hard money loans are entirely secured by hard assets like a housing property, vehicle, or commercial land. Since the risk of default is 100% borne by the collateral, these loans have pretty lax qualification requirements. Most lenders release funds without scrutinizing your credit scores, income statements, and tax returns, so the construction activities can be launched pretty quickly
  2. Unsecured personal loans—If you don’t want to put your home equity on the line, you can opt for unsecured personal rehab loans. These loans are approved on the basis of your current income, debt loan, and credit history. They tend to carry much higher interest rates, upfront fees, and closing costs than hard money loans

Non-traditional loans come with flexible repayment terms and can work in various scenarios, either as a temporary or permanent financing solution. They are typically used by borrowers who:

To decide on the kind of financing you should look for, start with evaluating what you qualify for and how fast you need the rehab work to begin. We’ll dive into some popular traditional and non-traditional rehab loan products in the following sections.

Source: RODNAE Productions

Traditional Rehab Home Loan Programs—Which One Would Work for You?

A traditional loan is usually a long-term commitment, so every applicant has to go through a litmus test of eligibility. We have summarized the rehab loan qualification terms and other guidelines for the three most sought-after programs offered by traditional lenders—they are:

  1. Fannie Mae Homestyle Renovation
  2. Freddie Mac CHOICERenovation
  3. FHA 203(k) Loan

Fannie Mae Homestyle Renovation

Fannie Mae Homestyle Renovation mortgage allows you to acquire funds for up to 75% of:

  • The purchase price and renovation costs of the house, or
  • The as-completed value (also called the appraised or after-renovation value) of the property—whichever is lower

Go through the following table to understand the core aspects of this rehab package:

AspectDetails
Borrower eligibility Minimum credit score—620
Maximum debt-to-income (DTI) ratio—45%
Eligible property One- to four-unit primary home
Condominium
Co-op unit
Townhouse
One-unit second home
One-unit investment home
One-unit manufactured home
Eligible costs Material and labor expenses for any kind of renovation
DIY costs for select properties (up to 10% of as-completed value)
Relevant fees, permits, and licenses
Mortgage payments for up to six months (for uninhabitable homes)
Renovation deadlineMust be completed within a year of the loan closing date
Down payment3%–25% (depends on property type and occupancy)
Maximum loan limit$548,250 ($822,375 in high-cost markets)

The interest rates for Fannie Mae Homestyle Renovation loans are competitive and vary from lender to lender. The rates are typically higher than standard mortgage rates but lower than credit card interest rates.

The application paperwork is complex and must include detailed renovation documents, contractor agreements, etc. The screening process takes about 90 days, and the lender bank sends the first allotment of funds directly to the contractor.

Source: RODNAE Productions

Freddie Mac CHOICERenovation

The Freddie Mac CHOICERenovation program is pretty much like the Fannie Mae Homestyle Renovation loan in terms of eligibility and processing. It also enables you to fund up to 75% of the after-renovation value of the property. Check out the other essential terms in the table below:

AspectDetails
Borrower eligibility Minimum credit score—620 to 660 (depending on the lender)
Maximum debt-to-income (DTI) ratio—Not specified
Eligible property One- to four-unit primary residence
Manufactured home
One-unit second homes
One-unit investment property
Properties in planned unit developments
Eligible costs Material and labor costs
Expenses for disaster-proofing homes
Relevant fees
Six monthly interest or insurance payments, in some cases
Renovation deadlineMust be completed within a year of the loan closing date
Down payment5%–25%
Maximum loan limitVaries

Freddie Mac CHOICERenovation also requires intense documentation, but in this case, you have the option to work with a home improvement store instead of a contractor (if you can’t afford one).

FHA 203(k) Rehab Loan—Requirements and Other Terms

FHA 203(k) loans are backed by the Federal Housing Administration and are geared towards low-income households and borrowers with a poor credit history. Keep in mind that FHA does not release the funds but an FHA-approved bank or private lender.

Here’s how to qualify for a 203(k) rehab loan:

  1. Have a credit score of at least 500
  2. Keep your DTI ratio no more than 43%
  3. Employ an eligible contractor’s services to complete the repairs
  4. Work with a U.S. Department of Housing and Urban Development (HUD) consultant (if the loan amount is over $35,000)
  5. Use the house in question as a primary residence (which means investment properties do not qualify)
  6. Get a mortgage insurance premium (MIP) upfront
  7. Provide a minimum down payment (3.5%–10%)

The qualification parameters may vary slightly depending on the lending institution. While almost all kinds of repairs are doable, you cannot use FHA rehab loans for extravagant additions to the property (such as a swimming pool or a tennis court). 

You can typically choose between two FHA rehab programs:

  1. Limited or streamlined 203(k)—It’s a low-regulation, minimal-inspection version of the program that caps your borrowing power to $35,000 
  2. Standard 203(k)—This program is suitable for borrowers planning time-consuming and structural repairs exceeding $35,000. You have to be prepared for aggressive periodical inspections and more paperwork submissions if you opt for this option

Finding It Hard To Get a Rehab Loan via Traditional Channels? Try Non-Traditional Options

Traditional house rehab loans are great for rolling in home purchase and renovation costs into a consolidated mortgage, but many borrowers get discouraged due to the drawbacks of this form of financing. 

For starters, shopping for conventional or FHA lenders drains you. The application process isn’t a cakewalk either. From complicated paperwork to after-qualification compliances, the borrower has to jump through hoops repeatedly to keep up. The worst part is the time-sapping approval process—your desired property can easily be acquired by another buyer during the weeks/months that you waste waiting for funds.

The limitations of traditional lending have created a space for non-traditional lenders, especially hard money lenders, to thrive.

Hard Money Rehab Loans for Houses and Investment Properties

Hard money lenders offer rehab loans to first-time buyers, multi-property owners, and real estate investors without much paperwork hassle. They skip the lengthy income verification process, personal credibility check, and contractor vetting—all a staple in the traditional lending scene. Most hard money lenders focus only on the after-renovation value of the collateral to determine what amount to lend.

If you get rejected by conventional or FHA-approved lenders due to strict guidelines, most hard money lenders won’t mind funding you as long as your rehab deal sounds reasonable. Thanks to time-conscious processing, you can have the funds within one to two weeks, which will enable you to:

  • Cut down on wait time and close purchase deals faster
  • Kickstart renovation plans without delays (whether on your own or with the help of a contractor)

Borrowers who can qualify for traditional financing options use hard money loans as an interim arrangement while they wait to hear back from or get approved by traditional lenders. Upon approval, they refinance the hard money loan with a suitable long-term traditional mortgage.

The terms of hard money rehab loans depend on the lender and the state where your property is located. In general, the interest rates are 0.5%–5% points higher than traditional options, and the repayment tenure is 1–3 years.

Need a Quick Purchase and Rehab Loan? Reach Out to Hard Money Loan Solutions

If you need a convenient rehab loan for a property in Florida, try the reputable local lending group—Hard Money Loan Solutions (HMLS)

HML Solutions is a team of experienced investors and entrepreneurs who are ready to fund the purchase or rehab of any real estate property. Powered by private capital with no bureaucratic deadweight, the HMLS team can lend to anyone (prospective homeowner or investor) who brings good collateral and has decent equity in the property.

Source: Alena Darmel

Getting home rehab loans from HML Solutions comes with the following benefits:

  1. Minimal paperwork—You won’t have to deposit bundles of documents with your HMLS loan application. The lenders don’t ask for tax returns, W2 forms, and credit card statements, but you do need to provide basic information about:
    1. Construction projections
    2. Projected after-renovation value
  2. Speedy turnaround—Because of lax lending protocols, the investors at HML Solutions can fund deals within 3–14 days
  3. Flexible lending terms—The HMLS team evaluates every rehab request on parameters like the capital requirement, construction rates, and borrower’s past rehab experience. The eventual loan package and repayment schedule are customized according to the candidate’s ability to pay
  4. Direct fund release—You don’t have to bear with intrusive inspections for access to funds. You usually get the total loan sum once your loan is approved
  5. Personal guidance—HMLS lenders have a personal interest in funded rehab projects because of the lending risk involved. They offer personalized and realistic guidance to clients struggling to manage the loan 

HMLS Rehab Loans—Interest Rates and Other Terms

HML Solutions charges competitive interest rates that depend on the LTV desired. The lenders typically charge 9.99%–12% for rehab loans. HMLS lenders currently provide up to 70% LTV (calculated on the value of the asset or the purchase price, whichever is lower).

Check out some other core terms you can expect if you qualify for an HMLS rehab loan package:

Core TermsHML Solutions
Loan principal$100,000–$50,000,000
Tenure1–3 years
Interest rate typeFixed
Monthly paymentsInterest only (no amortization)
Down paymentNot required
Origination fee2 points or 2%
Closing time3 days to 2 weeks

HML Solutions doesn’t fuss over eligible properties or costs—you can spend the loan as you think fit without having supervisors breathing down your neck. That being said, remember that hard money borrowing is like any collateral-based funding. You are at the risk of losing your property if you default, although HMLS lenders allow defaulters sufficient window to consider alternate repayment strategies before foreclosing.

How To Apply for a Rehab Loan With HML Solutions

The loan application and approval process at HML Solutions is built around no-nonsense, straightforward talks with lenders who have extensive property rehabbing experience. To apply for a loan, do the following:

  1. Access the HMLS loan application page
  2. Enter your contact details
  3. Provide info about the house or property
  4. Submit the application

An HMLS lender will evaluate the viability of the property and call you to discuss the rehab deal in detail. Answer their questions clearly to help them process your loan faster. HML Solutions prioritizes transparency, and if a lender feels your projected cost is unserviceable, you will know right away.

Once your loan is approved, the HMLS team will work out a fair loan package tailored to your situation. You can collect your funds within the next few days, right after the title work and legal documentation process is done.

HML Solutions also funds other commercial and consumer deals, such as:

Fill out an HMLS loan application today to reach out to a lender with the specifics of your situation.

Source: Pavel Danilyuk

Are There Other Alternatives To Rehab a Home?

Beyond bank loans and hard money loans, your options to fund your home rehabbing are limited. Here are some common alternatives you can consider:

  • Home equity line of credit (HELOC)—Taking a HELOC is one of the simplest alternatives to a rehab loan. The open-ended product allows you to draw out up to 85% of your home equity over an extended period (up to ten years). You pay compounded interest on the amount you draw. Be careful not to overspend if you use a HELOC
  • Cash-out refinance loan—If you have a long-standing existing mortgage on your house, you can refinance it with a larger mortgage, called a cash-out refinance loan. Based on the current market value of your house and your equity share, you should be able to have enough to pay off the old mortgage and retain a margin for repairs
  • Credit card funding—Credit card financing requires no explanation. You can use it to fund repairs and renovations on the go. Remember that credit card interest rates are high and can further go up with unpaid balances 
  • Home equity loan—A home equity loan is like a HELOC, but you receive a lump sum of money. It can work for structural repairs, but your monthly interest obligation will be high 
  • Savings—Using your savings helps you stay on budget and avoid finance charges altogether, but financial experts say it’s a poor use of money if you have long-term investment goals

Conflicted with too many choices? Factor in tax benefits, monthly payments, and your income stream to pick a workable option.

Featured image source: Umanoide

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