Things to consider when comparing lenders After you’ve looked at…
Residential Rehab Loans
Hard Money Residential Rehab Loans
There are two types of residential rehab loans that are available to investors.
- Permanent Mortgage for Rehabs – These are offered by Fannie Mae, HomeStyle Renovation fund owner-occupied renovations, as well as one single unit investment property. The mortgages are similar to FHA 203k mortgages, are have very strict limitations on who can get them, and how they can be used.
- Hard Money Rehab Loans – These are the types of loans that Delancey Street provides. These are provided by private lenders. They help investors get property, and renovate the property as well. Hard money rehab loans are used to fund single family homes, as well as multi-unit homes. There’s no limit on the number of properties you can finance using a rehab hard money residential loan.
Permanent Mortgage for Rehabs
HSR mortgage is a permanent mortgage given by Fannie Mae. It lets you finance an owner occupied renovation, or the purchase and renovation of a 1-unit investment property. HSR mortgages have a 30 year term, with interest rates between 4-6%. They are used based on a % of a houses purchase price. They are less common when it comes to rehab loans because of limitations. For example, you can only finance the purchase, and renovation, of one property at a time. In addition, the investment property can only be a single unit property.
Hard Money Rehab Loans
These are loans used by short term and long term investors to purchase and/or renovate properties. Rehab loans are frequently issued based on a % of the property’s after repair value. A property’s ARV, is equal to the expected amount it will sell for – after all renovations are done being made.
For example, if your home is listed for sale at $100k, but with $50k in renovations the home will be worth $200k, then the ARV is $200k. In this case, a rehab loan lender will give up to 70-80% of the $200k ARV – meaning $150k – 160k will be lent. For more information on hard money loans, you can visit our hard money lending page. We regularly handle hard money rehab loans. We have interest rates starting at 7.5%, and offer rehab loans of up to 80% ARV. We can provide investors with funding in as little as 24 hours.
Rehab Loan Rates / Terms / Qualifications
Smaller hard money lenders will offer a wide array of rates, fees, and qualifications. National lenders have standardized fees, terms, and qualification requirements. Below are some common terms you can expect.
Interest Rates: 7.5% – 12% (interest only payments, not fully amortized)
Loan Term: 3-24 months
Rehab loans combine a property’s initial purchase price, and the rehab budget, into one loan. Hard money lenders will look at the maximum loan amount, basing it on the property’s loan to value ratio/after repair value ratio. The LTV ratio is based on a property’s initial price of purchase. The ARV ratio is based on the property’s expected fair make sale price, after all of the renovations are made.
When a property is being purchased which is in good conditions, hard money lender’s will issue a loan based on the property’s LTV – up to 90% of the initial purchase price. When you’r investing in a property which requires significant renovations, hard money lenders typically issue the loan based on a % of the property’s expected after repair value. The largest rehab loan offered is equal to 80% ARV. The more experienced you are with residential rehabs, the higher you can borrow.
Borrowers looking for a rehab loan should expect to cover up to 20% or more of a property’s after repair value with their own cash. Some lenders, will require that investors pay for the renovation costs up front, after which the lender then reimburses the investor for the rehab. This ensures the borrower has enough skin in the game, and continues to take interest in the development of the property.
Below are some general guidelines on loan rates, fees, and terms:
Interest rates – 7.5% – 12%
Loan term: 3 months to 3 years
Interest rates on rehab loans generally run between 7.5% and 12% – they are higher than traditional mortgages due to the risk in a rehab project and the short period of time during which the interest is charged. In almost all cases, you’ll be expected to make only the interest payment, with the principal not being part of your monthly payments. Points on a rehab loan are considered upfront costs and come out of the loan.
Rehab loans typically have repayment terms of 3-36 months, depending on your needs. The time frame is long enough for an investor complete the renovations, and exit the property. If your goal is to make money flipping houses, then your exit strategy means listing and selling the renovated property. If your goal is to be a landlord, then your exit strategy is finding renters, and then refinancing with a permanent mortgage. Most hard money lenders will require homeowner’s insurance, like title insurance, closing and escrow insurance, and also disaster insurance when it’s necessary.
Rehab Loan Application Process
The rehab loan application is broken into two steps.
- Pre-qualification: Provide the lender with estimated project information and borrower information
- Closing: Provide the lender with the sales contract, and the contractor quotes to get the final residential rehab loan
Pre-qualifying for a Rehab Loan
Hard money lenders have a pre-qualification process which allows investors to figure out the expected ARV ratio, the costs, the fees, and other terms. It is a quick and non-binding process. With this pre-qualification, a real estate investor can move forward knowing that financing is available when needed.
While the loan terms aren’t set in stone at this stage, you will be given an assurance on whether or not financing offered by the lender is going to fit your projects parameters.
Closing Rehab Loan
Closing takes the numbers used during the pre-qualification process, and uses in-depth research in order to finalize the loan amount, the costs and fees, and terms. During this stage is when you get final approval for the loan, and get the funds needed to close the deal and move forward.
Here’s what you should expect to provide to most lenders during this closing phase:
List of past projects
One of the most important things a hard money lender wants to know is your past rehab experience. If you expect to do the renovations yourself, then a lender will want to see 2-3 previous projects. You have to show prior purchase agreements, rehab invoices, and proof of sale/refinance on each project.
If you’re a new investor looking for a hard money residential rehab loan, and aren’t going to do the improvements yourself, then you need to work with a licensed contractor. In this case, a residential rehab lender will want more information on the contractor, i.e. company name, license number, scope of work contracted, the bid, and timeline.
Scope of Rehab Work Proposed
The scope of the rehab work should detail what renovations you are going to be doing. Your property’s expected scope of rehab work is crucial. It helps determine its ARV. The scope of rehab work can be determined either by yourself(if you’re an experienced rehabber), or by a contractor if you’re inexperienced. Lenders typically require a contractor to perform the work, if it’s a complex rehab project, but will let you do your own work if the project is simple. If you’re using a contractor, then the scope of the work is included in the bid. If you’re doing the rehab yourself, then you’ll have to prove the scope of the work by providing an estimate of the materials, and a time for completion.
If you’re an inexperienced rehabber, then a hard money lender will require contractor bids as a part of the scope of the work to be done. This helps the lender understand the cost of the rehab, and is used to calculate the property’s ARV. Experienced rehabbers doing their own work need to only provide a scope of work, and expected budget.
Most hard money lenders have an approved list of appraisal companies. When completing your application, the lender will conduct appraisals as a part of their due diligence. The lender will conduct an “as-is-appraisal,” and an “ARV appraisal.” Both appraisals tell the lender about the current fair market value, as well as the expected value after renovations have been made. Lenders rely on the appraisals to verify the price listed in the contract, as well as the ARV + loan percentage. Appraisals are typically paid for by the borrower as a part of the closing costs, but sometimes, can be included in the lender’s application fee.
Purchase contracts are documents which lenders want to see. It states the final sale price, and the terms of the purchase. In most cases, the agreement is signed and stipulates the purchase is contingent upn lender approval.
Fees and costs
With most hard money rehab loans – come fees. There are fees, which are the upfront costs called points, and then the interest payment itself. Some lenders hold back the rehab funds until renovations are fully completed. It helps ensure that the investor has skin in the game and completes the project on time. Rehab investors should expect to cover the closing costs of 2-5%, as well as to make monthly interest only payment through the life of the loan.
Who are rehab loans good for?
Rehab loans are great for fix-and-flippers, and long term investors.
Fix & Flippers – Short term investors who are looking to fix, and flip, a house, are great candidates for rehab loans. The investment objective of a short term investor matches the variables of a hard money rehab loan. The most important benefit of a rehab loan, is that you can finance and purchase underpriced assets that are in poor conditions. Rehab loans lump together the cost of the initial purchase, and the renovations, into one loan. This is contrary to conventional mortgages which do not fund renovations, and which also require the house is in good condition prior to it’s purchase.
Another great benefit is that the life of a rehab loan is usually 12 months or less. This is great fix and flippers who are renovating and selling. In addition, rehab loans offer interest only payments, which means the principle is owed at the end of the loan’s life. Moreover, it means the monthly payments are less than a mortgage where you have to pay the principal + interest every month.
Long term investors – Rehab investor loans are great for long term investors who want to purchase and then rent out a property. You can rehab hard money loans to finance the purchase of a poor condition home. Conventional mortgages don’t allow that. If a long term investor wants to buy an underpriced property and renovate it, and rent it out, then the first method is to get a rehab loan. After it’s fully renovated, you can then get a conventional 15-30 year mortgage.