Is there such a thing as a non-FHA rehab loan?

8 Replies

Is it possible to obtain a mortgage that includes funds to renovate a property, other than via the FHA 203k program? For example, could you go to Chase or some other typical bank and obtain a loan for say 175k to buy a property for 120k and put 55k worth of work into it? A low down payment is not needed and credit is decent.

In the conventional lending world, you are talking about a construction loan.  Not sure about the big banks, but smaller, regional banks for sure...that's who I always deal with.

You go to them with a property and your ideas of rehab, estimates etc.  They give that to an appraiser who goes out and tells them the as is value and after repaired value.  Assuming the numbers work and you aren't paying too much for the house, then you get access to 80% of the as repaired value....in chunks.  The first big chunk is to buy the property.  Then you start rehab and as work is completed, you get additional disbursements to pay vendors....if the bank is smart, it requires lien release/waivers to make sure there are not any partial payments.

If you run out funds before the work is complete, you pay the rest out of pocket or try to borrow elsewhere.  

The bad part of these loans is that they are temporary....6 months - 1 year interest only with a balloon payment for balance in full.  You want to rehab this and keep it for yourself or rental, you get to refinance it into a permanent loan and pay closing costs and loan origination costs again.  The 203K loan program auto converts into a term note.

If you are flipping it and can get it sold before the note is due in full....then no worries.

This is the reason I have a couple rentals with HELOCS.  I advance them to take on new projects and crash the debt with rental revenue along with any sale or cash out refi proceeds when the rehab has been done.  Much cheaper and easier to do it this way but it obviously took time to get the properties and the equity that allows me to do this.

There is also the Fannie Mae HomeStyle loan. Don't confuse this with the HomePath loan that is ending this week. I just learned of it last week while working on a deal I was considering. Here is a fact sheet about it:

https://www.fanniemae.com/content/fact_sheet/homes...

I'd love to hear anyone's experience with this product. They told me it would be an 80% LTV based on the appraised value and the interest rate would be around 5.5-6% for investors.

Edit to Add: 

The lender also told me the HomeStyle loan could be used on any property, not just certain pre-determined properties like the HomePath loan was.

@Corey Demuth  

@Chris Simmons  is exactly correct.  Banks often refer to these as "bridge" loans, in that they bridge the gap between the current appraised value and the future assumed value.  The larger banks to grant them.  However, everything is more difficult with the bigger banks, unless you already have a relationship established with a lender there.

Just remember, even with a bridge loan and a solid estimated future value, the bank will likely only lend 70% - 80% of that estimated future value. Even on the bridge/construction loans, they are still looking at LTV.

Thanks everyone. @Austin Lee does the HomeStyle loan automatically become a full 30-year fixed loan? Is the 5.5-6% only for investors (is it a normal interest rate if it is not an investment?)

@Corey Demuth  

I think it is automatically a 30 year loan with no change over like in a construction-perm loan. The interest rate was for an investor (NOO) with very good credit. For an owner occupant it would be about 4.5-5% according to the lender I spoke with. I am very interested in learning more about the program if anyone else can chime in.

I also wonder if one were to put down 20% on a FHA 203k loan, could they get out of having to pay the absurd mortgage insurance? FHA mortgage insurance is HIGH.

@Corey Demuth

The only way to reduce FHA MIP is to put a minimum of 10% down, then it will be on the loan for the first 11 years instead of life. Depending on the loan amount, it might be better to refi to a conventional loan after the work is done.