How Does A Real Estate Rehab Loan Work?

If you are looking to buy a home for resale purposes, but it needs a lot of work done to it, then a rehab loan may be exactly what you are looking for. Here are some questions you likely have about this unique type of loan.

What Kind Of Work Can Be Done With A Rehab Loan?

While a home that needs some work can be a great opportunity if you do the repairs and make a profit, you may be limited to what you can do to actually repair the house. If you are getting a streamline 203k rehab loan, for example, know that you will be limited to doing rehab work that doesn't alter the structure of the home. The lender will want to make sure that the home is structurally sound before you begin the rehab process, and will typically limit loans to those that only need changes to the cosmetics or utilities. The lender may also limit how much can be spent on rehab costs, and not approve a loan if too much work has to be done. 

A full 203K rehab loan is a bit harder to get, but it will allow for you to make bigger structural changes to the home. The limits for rehab costs are also going to be much higher, allowing you to perform work that can be as extreme as demolishing the house.

Are There Special Terms For The Loan?

Know that a rehab loan is going to be different than a traditional mortgage you get on a home. You won't be getting the loan for 30 years and making payments toward the principal. It is very common for rehab loans to be for a short amount of time, and for the borrower to only pay interest on the loan. You would repay the loan in full once rehab is complete and the home is sold, so you will need to work within the terms of the loan to make sure it all happens.

Do Rehab Loans Require Special Approval?

While a normal home loan will require a home inspection and appraisal, expect more work to go into getting a rehab loan to ensure that the lender is investing in a viable property. Your estimates for rehab work will need to be verified to make sure that it is properly estimated. If they lender feels that the rehab work exceeds the maximum amount offered in a streamline 203k loan, you may not get the loan approved.