What Is A Rehab Mortgage and Is It Right For Me?
With the popularity of home renovation and DIY shows, it’s no wonder rehab mortgages are getting so much attention. A rehab home loan is another name for an FHA 203(k) loan, a type of loan designed to finance home improvements.
There are a lot of benefits of taking on a rehab home loan, but that doesn’t mean it’s right for you. You’ll need to consider the pros and cons of this type of loan before starting the lengthy and often complicated application process.
How Do You Get a Rehab Mortgage?
First, what are the eligibility requirements for a 203(k) loan? Like most types of home loans, you need to make sure you qualify before you start the application process. The requirements include:
- A property that needs cosmetic repairs or updating (this could be your existing home)
- A qualified lender
- Meeting all the lender requirements (debt-to-income ratio, proof of income, etc.)
- Minimum downpayment of 3.5%
Because a 203(k) loan is insured by the Federal Housing Administration (FHA), you’ll need to search for FHA-approved lenders. This helps you achieve the loan without a large down payment, and you can feel confident that it’s backed by the government.
Why Get a Rehab Home Loan?
Why might you consider a rehab home loan instead of another type of loan? There are a lot of benefits that come along with a 203(k) loan. The biggest perk is that it’s easier to qualify for than other types of loans. Because of its affiliation with the FHA, many lenders are more lenient about who they’ll approve loans to and there’s only a 3.5% down payment needed.
Another benefit is that you might be able to upgrade a home within your budget to suit it to your style and needings. Rehabbing a home isn’t easy, but it is more affordable than buying a home that comes with all the frills right off the bat. If you’re comfortable doing your own renovations or hiring a contractor, this might be a good fit for you.
When Shouldn’t You Rehab Mortgage?
However, like most loans, it’s not always a good fit depending on your situation. The biggest thing to be aware of is that there are limits to a rehab home loan. There are two main limits to be aware of:
- Unit Numbers – You’re only permitted to purchase single and multi-family homes with less than five units.
- Certain Upgrades Aren’t Covered – Next, there are two types of 203(k) loans. The first type is known as streamline, and this covers only non-structural repairs for things like appliances, floors, bathroom renovations, and so on. The second type is known as standard, and this will cover structural repairs like flood damage, foundation work, etc.
Ultimately, you’ll need to consider the types of repairs you’re planning to make as well as your long-term goals. If you’d rather move into a home that’s move-in ready and doesn’t need any work, a rehab home loan isn’t for you.
Finding the Right Loan for Your Home
When you buy a hew home, whether it’s for your family or as an investment, you want to get the most bang for your buck. a 2o3(k) loan helps you accomplish more with the money you have, making certain types of renovations and repairs more affordable without a large downpayment.
That being said, make sure a rehab mortgage is right for you before starting the application process. You don’t want to run into a situation where you’ve blown your budget or ran into problems not covered by your loan type.