Rehab Financing Inquiry

10 Replies

Hey everybody,

I'm curious as to what loan options there are for rehab work. For example, say you buy a property for 350k, but it's going to take 150k to bring it up to standard (livable). Is there a separate loan with a similar interest rate (to your mortgage) you could take out for the 150k of rehab? Or is there a way to wrap the mortgage and rehab loans together?

I was researching some old posts and, correct me if I'm wrong, it seems like you could do this with an FHA 203K loan?

However, what if you have more than 3.5% to put down and don't want to live in the property (just rent it out) what would some other loan options be? 

Thanks for your time everyone.


@Jonny C. There are rehab loans. They do not come with the same interest rates as standard mortgages. Some portfolio lenders actually do straight rehab loans. Generally, they will require an evaluation of the work to be done and a quasi appraisal of what the property will be worth, once it is ARV. Then the total of the purchase loan and the rehab loan will still have to conform to their LTV underwriting standards. Other portfolio lenders will do a bridge loan, much like what they do for new construction, where there wrap both the purchase and the rehab into a single instrument, which then converts to a standard mortgage, once the work is complete and the property is appraised. This type of loan would still require the same review of the work to be done and the general requirement of conforming to the lender's LTV guidelines.

There are options, but you're going to have to find a portfolio lender to access those options.  NOTE:  Portfolio lender, in this context, does not mean they are lending against a portfolio of properties.  It's referencing their portfolio of loans.  Specifically, these are lenders who keep the loans they originate on their own books and service them in house.  They do not sell off their loans, which means they have great latitude in their underwriting standards.  These are generally small, local banks and credit unions, and these types of loans will be handled by a commercial loan officer.  Stay away from the large, high-volume originators like Chase, Citi, BofA, etc.

Jonny Cerri yes you could do this with the 203k, but it requires owner occupancy. The good thing is that because it is a guaranteed loan by the gov't they aren't much different for rates because the risk to the lender isn't there. You do have to be a first time home buyer.

@Dave G.

I'm a first-time home buyer, no problem there. I'd like a smaller mortgage, can I put more than 3.5% though? Also, how long do I have to live in the property for? 1 year than I can move out? Thanks!

The minimum is 3.5%, i suppose you could put down more if you want. 

How long you have to live in it is a sticky situation. Unless official guidance by HUD has been handed down recently that I dont know about, it is a big grey area. If you aren't planning on renting it out, it's probably moot. Some say 1 year, some say "it's not specifically in the mortgage doc" but it is inferred. Some say 90 days then you can sell because "what are they gonna do, you're paying them back."

The one observation that concerns me if you are planning on renting is the number of people who say that if your intent prior to getting the loan is to use FHA financing to buy a place, move out, and rent it; you are then committing mortgage fraud. Whether or not anyone has been prosecuted on it (or if it is even plausible ), I don't know. But I don't want anyone coming after me for fraud.

the minimum for a 203k IS 3.5% but expect to pay another 6% of the total loan amount in closing costs. If you want to contribute more than the 3.5%, that's fine but be aware it takes a LOT more than 3.5% to close a 203k. 

As for the mortgage fraud statement above, I agree. When you are still under FHA financing, yes you can not rent it out. but once you refinance out of the loan, you are no longer under FHA guidelines. I told my broker that my intentions were to live in it for the required duration, refi, and rent out...they didn't care. As long as you play by the rules while still under FHA, your intentions shouldn't matter.

see discussion for when you can refi out of a 203k:

Oh ok. I thought there was some minimum amount of time you had to stay before renting it out. How long would you have to wait to refinance? 6-12 months?