What is a Rehab Loan? | FAQ |
California
 A
rehab loan is intermediate financing primarily for the
rehabilitation of a home or commercial building. Rehab loans are
available to buyers who want to purchase a house or building that is
in need of repair. These loans typically close quickly with less
documentation.
Rehab loans provide short-term funding for a consumer or a business until the
borrower obtains the permanent or payback financing. Money from the
new permanent financing provides the exit strategy, the "take out
loan" for payoff of the
short-term rehab loan.
Consumer rehab loans are generally for distressed owner occupied
residential properties, while commercial rehab loans are for
non-owner occupied residential properties and commercial buildings.
Short-term rehab loans are usually more expensive than conventional
long-term financing
to compensate for the additional risk of the loan.
They typically
have a higher interest rate, points and other costs that amortize
over a shorter period than a permanent long-term conventional loan. The
hard money lender also may require
cross-collateralization and a lower loan-to-value ratio.
Some rehab loans are not only for improvements on the property, but
also for the purchase of the property. The bargain or distress price
and the additional value to the home after repairs make the loan
fully secured in the end.
These 100% financing types of loans fund through banks, but a
governmental agency insures them to make the risk more acceptable to
the lender.
Rehab loans that fund both acquisition
and rehabilitation costs are available through the
Housing and Urban Development 203(k) loan program. Loans under the
203(k) program are limited to structures designed for one to four
families.
What is a hard
money rehab loan?
Recent reports indicate that hard money loans
are becoming the major supply of funding for rehab real
estate transactions.
A hard money rehab loan is generally an asset-based loan,
for a physically or financially distressed property.
Private investors and business entities
fund hard money rehab mortgages, not banks or traditional
institutions.
Usually the credit score of the borrower
is not important because the hard asset value of the real estate
property secures the loan.
Hard money rehab loans typically fund a
commercial property or a non-owner occupied residential property
that does not qualify for traditional, permanent, long-term
financing until repairs are completed.
Do hard money lenders lend on purchase price or after repair value?
Private hard money lenders typically consider lending up to 80% of the
purchase price.
This 80% maximum does
not mean they lend 80% in every situation, or on all property types.
Some hard money
lenders loan up to 80% of the purchase price, not to exceed 65% of
after repair value (ARV).
Do clients need to pay for any fees up front?
Competitive private hard money lenders do not require any fees up front. Their fees are
paid at close of escrow. If the borrower must pay an appraisal fee up front
it would be paid to the appraiser.
Who orders the appraisal?
Private hard money lenders generally handle their our own appraisals.
Usually, they do an in-house appraisal when the property is typical
for the neighborhood and sales comps are available. In today's
market, they look very closely at the value and the value trends.
If this is not
the case, they will order an appraisal with an independent licensed
appraiser.
It is not
recommended that borrowers order their own appraisal. All
lenders consider
appraisals ordered by the borrowers to be less credible.
Do
hard money
loans cost more?
Short-term hard money rehab loans are more expensive than long-term
permanent conventional loans. Their rates and fees
are more expensive than bank, government, or other institutional
lenders.
Avoid private lenders and hard
money loans if you can find less expensive conventional financing.
Hard money rehab
loans are valuable if you need money fast
and/or short-term for investment.
Do they report to the credit agencies?
No. They do not report payment history or any loan information to
any credit agency.
What happens if a borrower cannot make monthly
mortgage loan payments?
The borrower risks, through foreclosure, the property, late fees, collection
costs, and foreclosure fees.
How long does the loan process take?
It typically takes 7 to 10 days from start to finish. You will
receive your pre-approval on the same day submitted, and approvals
within 24
hours after receipt of requested documents.
Will hard money lenders pull a borrower's credit report when they apply?
No. Credit is not necessary for lenders to make a loan decision.
If necessary to assess risk, they don't
pull a client's credit until after they know they are making a loan, and not without the
borrower's permission.
How do I get
started?
The starting
point is to apply
online by submitting a loan request for a same day preapproval or
by calling 1-949-945-5834 with your loan scenario.
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