The Difference Between a Conventional & a Rehab Loan
Both a conventional and a rehab loan can be used to secure property for the purpose of fixing it up. While both of these loans allow you to buy property, there are some specific differences between them. Rehab loans typically come with more restrictions on how the money can be used but are typically more appropriate for working with homes in disrepair.
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Home Value
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One of the key differences between these two types of loans is how lenders determine the amount of the loan. With a conventional mortgage, the lender will have the property appraised and it must have a current value of more than the loan amount. This prevents you from buying a property that needs major renovations. With a rehab loan, you can get a loan based on the projected value after the repairs are completed on the property. This figure is determined by a real estate appraiser.
Distributions
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Another key difference between conventional loans and rehab loans is in the way the money is distributed. With a traditional loan, you get all of the money from the loan up front in a lump sum. This allows you to purchase the property in full. With a rehab loan, you typically get the money in partial distributions. This might give you enough to buy the property on the front end and then give you regular draws to complete the repairs. For example, with the Federal Housing Administration's 203K rehab program, an inspector must check your progress before you can get more money for the work.
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Lenders
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While conventional mortgages are offered by most lenders, you can only get rehab loans from certain types of lenders. The FHA 203K program is one of the most commonly used rehab programs in the market. It is offered by lenders that work with the FHA. You can also get rehab loans from hard money lenders. These loans typically come with a very high interest rate and are short-term loans. A conventional loan can be secured by any lender that provides mortgages.
Process
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Another difference between these two types of loans is the process involved. If you want to purchase a property that needs renovations with a traditional mortgage, you may have to get two separate loans. You may have to get short-term financing to secure the property and then refinance with a traditional mortgage after repairs. With a rehab loan, you can typically use one loan to secure the property and to perform all of the repairs.
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