How to Buy a House Using a Rehab or Renovation Loan

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Given the economy, there are a lot of deals in the real estate market including foreclosures and short sales listed at below market prices. The problem with most of these bargain-priced homes is that they are usually in very bad condition and cannot be bought with a regular conventional or FHA loan. Questions abound including: How do you buy a home with mold or water damage? How do you buy a home that has a missing kitchen? How do you buy a home with missing HVAC system? One way is to buy the home for cash. The other way to buy a house that needs lots of repairs is with a renovation loan. A renovation loan is a loan you in which you use the money to buy the property and the money to make the repairs.

  • Your first step is to apply for a renovation loan. There are two main types of renovation loans. One is a conventional renovation loan. The other is a FHA 203K loan. You will have to decide which type of loan is better for you. The FHA 203K loan works best for those individuals who have only the minimum funds to buy the property. Consult with your loan officer to see which loan product is best for you and your situation.

  • Compile a list of contractors. You are going to need a licensed, reputable contractor to give you estimates and eventually to perform the work. If the property needs a lot of repairs, you may need to hire a general contractor who will then hire sub-contractors. Keep in mind that the bank is going to have to approve the contractor you select. It will check the contractor's credit and credentials. Ask the contractor if he has ever worked with a renovation loan. It is usually easier to get a contractor approved if he has already gone through the process once or twice before.

  • Identify a property. Contact a reputable Realtor to begin your home search. Tell your agent that you are already approved for a renovation loan and just need to identify a property.

  • Once you have identified a property you will need to get estimates; try to secure at least three estimates for the repairs. Keep in mind that depending on the type of loan, there may be a cap on the amount of repairs allowed. Also keep in mind that the property has to appraise for a repaired value that is equal or greater than the loan amount and the repair amount.

  • Select the contractor and estimate you will submit to the bank. The bank will work with the contractor to get him approved. If the bank does not approve the contractor, you will need to submit another contractor and another estimate.

  • The bank will send an appraiser to the property. If the property appraises at the right price, the process will continue.

  • Now you wait. The bank will ask you for all the required documents. It will verify your employment and funds to close. The process usually takes between 45 and 60 days.

  • Once the bank approves the loan and approves your contractor, you will be ready to go to settlement. You are ready to begin the repairs after closing. The bank will make a schedule of draws for the repair money. It may send someone to inspect the process. Once you have closed on the property, you have a specific period of time in which to finish the repairs.

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