What Are Rehab Loans?
Rehab loans are mortgages that consumers use to purchase or repair homes in need of major renovations. The Federal Housing Administration partners with lenders across the United States to offer rehab loans, but many state and city governments also offer similar loans, primarily to low-income people or homeowners buying property in low-income areas.
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Loan To Value
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When you finance the purchase of a home, the loan amount typically cannot exceed the value of the property. Most lenders require home buyers to make a down payment, which helps ensure the home value exceeds the financed amount. However, if you take out a rehab loan, you can finance more than the current value of your home because the loans are financed on the basis of the property's after-rehab value as opposed to current worth. At closing the lender releases sufficient funds to buy the property, and thereafter releases the remaining funds incrementally to pay for each stage of the home repairs.
Repairs
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You cannot use a rehab loan to add luxury upgrades to a home. Generally, people use the loans to buy homes needing new plumbing, electrics, roofing or other major renovations. You can also use proceeds from loans such as the FHA 203(k) rehab loan to decorate your home, but only once all major repairs have been completed. Lenders typically require homeowners to hire licensed contractors to complete necessary repairs. Lenders use cost estimates provided by the contractors to determine the loan amount.
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Benefits For Governments
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Municipal governments partner with local lenders to offer rehab loans because the loans enable people with limited incomes to buy homes. Governments attempting to rejuvenate derelict neighborhoods often use rehab loans to entice homeowners into economically depressed areas. In many states you can use locally offered rehab loans to make homes more energy efficient by installing new appliances, water heaters, and heating and cooling systems. Improved energy efficiency helps local governments conserve energy and cut costs.
Benefits For Borrowers
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Investors often make significant profits when they buy homes in a state of disrepair, fix the properties up and sell them for profit after just a few months of ownership. Lenders typically do not finance homes that need major repairs, so this means in the absence of rehab loans, only cash buyers such as investors can buy these properties. Generally, it costs less to buy a property needing some work and to fix it up then it costs to buy a home in perfect condition. Therefore, homeowners who use rehab loans usually end up with more home than they could otherwise afford.
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