Pros & Cons of a Rehab Mortgage
More and more purchasers are looking for innovative methods to buy their ideal houses, with the current real estate market showing higher demand than supply. Some people are choosing to buy rehabilitation or renovation properties instead of losing another bid or not being able to meet mortgage specifications. Rehab Mortgage Loans may be a better answer than selling your current house and buying a new one in today's tight housing market. Rehab loan providers bundle together the cost of renovating your current property with the price of acquiring a larger or more up-to-date home.
Similar to any loan product, there are several factors to consider when determining between rehab mortgages, including the specific type, requirements, and qualifications. The government-backed Federal Housing Administration FHA 203(k) offers two: Limited and Standard. Conventional options, such as the Freddie Mac CHOICERenovation and Fannie Mae HomeStyle, are also appropriate solutions.
When considering what’s best, it’s important to work with a reputable and approved lender, such as Avance Group, for guidance.
Government-Backed Rehab Loans
The FHA's backing distinguishes these loans from standard rehabilitation loans. Renovation and house purchase loans under the 203(k) program get funding for both home improvements and additions.
>> It’s important to note that this loan has two sub-types. One is designed for renovation type, location, and work scope. The other is focused on the purchase of a new home which will need renovations.
The Limited 203(k) is meant for less extensive renovation projects, if you're looking to do non-essential repairs like changing your flooring, buying new appliances, or doing some work on your bathroom or kitchen, this is the best option for you. Depending on your location, total costs are limited to a certain amount.
The Standard 203(k) is for major renovation projects, and there’s no limit on the repair amount. This can finance up to the lesser of 110% of your home’s future value or the as-is value plus renovation costs. This loan is geared toward foundation damage caused by flooding, hurricanes, and other natural calamities. Because more costly and time-consuming repairs are required, the maximum amount available has increased.
A specialized 203(k) loan may be used to finance value-added, non-structural modifications to customize the house to reflect your own style. These include wall colors, flooring, cabinetry, worktops, and other visual upgrades.
The FHA 203(k) loan is a less-strenuous type of loan that does not require excellent credit history or scores, has looser debt-to-income requirements, and higher limits. Even though the FHA doesn't actually give buyers the funds directly, it does insure loans given by approved lenders-- like us at Contour Mortgage.
Low Down Payment
Not only does a 203(k) loan have other great benefits, but the down payment is also much lower than a conventional loan. You can put as little as 3.5 percent down at closing and still get your dream home! Plus, you'll have more money available for things like furniture, moving expenses, and anything else you might need.
203(k) mortgages enable buyers to finance the purchase of multi-family homes, with a maximum of four units.
Prior to approval, all repairs and improvements must be specified and itemized. A trustworthy lender can ensure that you have the most up-to-date and correct information. It's also a good idea to double-check every coverage items and amounts.
Conventional Rehab Loans
Aside from FHA-backed 203(k) rehab loans, another option is the HomeStyle Renovation Mortgage offered by Federal National Mortgage Association, or more commonly known as Fannie Mae.
Fannie Mae Homestyle
This mortgage is offered as both a fixed- or adjustable-rate mortgage (ARM), and the original principle may not exceed Fannie Mae's maximum loan limit.HomeStyle Renovation Mortgages: Loan and Borrower Eligibility requirements state that people borrowing to buy a home cannot spend more on repairs than “the purchase price of the property plus renovation costs, or 75% of the appraised value of the property once work is finished.”
Loan Type: Fixed or ARM
You can pick which option works better for you, however keep in mind that the original amount borrowed cannot surpass the allowed limit by the association for a regular main mortgage.
Teardowns and Complete Remodels Do Not Qualify
This loan does not cover the complete teardown or foundation rebuilding of your home.
You will need to disclose more documents than usual for this special loan, such as a work proposal, standard renovation loan agreement, and consumer renovation information.
All work must be completed within 12 months.
Freddie Mac CHOICERenovation
CHOICERenovation Loans can be used for anyone from single-family homes to investors with multiple properties. Similar to the aforementioned Fannie Mae HomeStyle, this fixed- or ARM is available at a 15- or 30-year term, and has lower down payment, DTI, and credit requirements.
Lower down payment and credit scores acceptable.
Lenders will accept a down payment as low as 3.5 percent, and lower credit scores.
It's not just for single-family homes.
This loan can be used to finance investment properties, second homes, or other multi-family dwellings in certain locations.
Bank-owned properties could require additional approvals.
If you're looking for foreclosure or auction properties, it might be a good idea to factor in more time for the approval process.
If you're considering a rehab loan, it's crucial to partner with a dependable lender. Avance Group is a local mortgage broker that can help you with your down payment assistance, home purchase, refinance, new construction, renovation, and more! Call us today at 817.524.6655 to get started!