If you’re wondering when to use a rehab loan, the simple answer is when a home needs a lot of rehabilitation or renovation. Hence the name “rehab loan.”
While that may seem obvious, knowing what a rehab loan is and how it works can help you make an informed decision when borrowing money to purchase a home. Read more to learn about what rehab loans are and when to use them.
What is a rehab loan?
A rehab loan is a type of niche loan that offers borrowers the opportunity to borrow more than the sale price of the home with the understanding that the home will be renovated immediately. The borrower can put a small portion of the after-repair value (ARV) as a down payment, then borrow to purchase the property and pay for renovation costs and resell the property at a higher price.
These arrangements are common for fix and flip housing purchases that need a lot of renovation before selling. These properties typically require more than just a fresh coat of paint and some new appliances.
This loan offers a different framework than a traditional mortgage because the borrower can pay for rehab costs with the borrowed money instead of paying out of pocket.
Why use a rehab loan?
These loans offer an ideal structure for house flippers. As previously mentioned, the borrower can borrow more than the sale price of the home, meaning that house flippers can perform renovations on the home without having to pay the costs out of pocket.
Since most house flippers work on a very quick timeline, it’s beneficial that their cash not be tied up in renovation costs. This loan structure mitigates the risk house flippers take on by reducing the amount of cash they need to spend upfront.
It’s easy to see how these loans would provide great opportunities for house flippers, but they can be used in many other situations as well.
For instance, let’s say you’re looking for a home to live in with your family. After searching for some time, you have found a home with the perfect layout in a great neighborhood, but the previous tenants neglected the upkeep for many years. Instead of applying for a traditional mortgage for the purchase price and paying for the repairs out of pocket, you can use this purchase structure.
This way, you are still paying for the repairs, but you’re rolling it into the mortgage of the house and paying them off over time rather than upfront. For this reason, rehab loans are also useful for individuals or families that have a steady income but may not have, or want to spend, the immediate cash for home repairs.
How do I apply for a rehab loan?
Applying for a rehab loan is as simple as applying for a traditional mortgage loan. With Park Place Finance, you can easily apply or learn more about when to use a rehab loan by contacting us on our website.
If you need funds quickly, we can close on loans in as little as five business days. Learn more about the benefits of choosing Park Place Finance for your loan by visiting our Hard Money & Rehab Loans page.