The Hard Money Rehab Loan
You’ve applied for a housing loan with your local bank. After waiting for a few business days, you find out that you’ve been denied. You’re not alone in this. Nearly 11 percent of all people were denied a home loan in 2017 alone according to the Customer Financial Protection Bureau. There is an easier way for you to get a home. It’s called the hard money rehab loan.
It will allow you to find a fixer upper, do some repairs, sell it, and pocket the money. You could then take that money and do whatever you want with it. Including putting a down payment on that home you were looking at. Sound good to you? Keep reading for a complete guide on these types of loans including the requirements, rates, terms, where to find them, and what to do once you’re approved.
Interest Rates
The interest rates for hard money rehab loans can be high. They run anywhere between 7.5-12 percent. The reason why it’s so much higher than traditional mortgages is because of the risk with rehab projects and the short 12 to 36 month loan time. As far as the loan amount that you’ll receive, it’s determined by the lump sum of the purchase price and the credit line for the expected repair cost. This usually adds up to around 75 percent.
Pre-qualification Process
To get started you’ll go through the prequalification process. You’ll need to turn in two or three months’ worth of your personal bank statements. Your credit score will need to be at least 550 which is about average. Lastly, you’ll need to answer a few questions about yourself, the property, and your expected offer amount. Make sure you have your tax ID ready to go too.
Final Approval Steps
Once you’ve been prequalified for the loan, you’ll need to take a few steps to get that final approval. Gather the purchase contract for the property you’re looking at along with a list of past projects that you’ve done and turn them into the loan provider. The lender will send back an application for you to fill out. Keep in mind that there will be an application fee of a few hundred dollars. Give or take.
Your Financing
When you’re approved for financing the lender will go everything with you about interest rates, fees, and a closing date. Once you’ve signed on the dotted line, you’ll be in the clear to get your loan. It’s not very often that the lender will give you all of your rehab money upfront. For example, if you have a 5,000-dollar budget on redoing all the floors in the home, you’ll get half of it before you start the floors and half when they are done.
Titles
When your Rehab loan is in underwriting, your lender will run a title search. The title to the home that you’re flipping will be required by the lender. If you’re not sure what title company to go through, your lender can suggest a few. Once this is done, you’ll receive a commitment letter from your lender letting you know when the loan closing can happen. There will be a closing fee.
Do your Renovations
Finally, you own the property and have your loan. Now you can get to your renovations. These need to be done professionally because according to Daniel Bortz, writer and licensed realtor, “even small cosmetic flaws, like an ugly shade of carpet, can make some home buyers run” but they need to be done quickly. The longer it takes you to sell the property, the higher or carrying costs will be. This means less profit for you.
Now that you’ve finally got the property renovated, you’ll need to start your exit strategy. Most people do this by refinancing into a more permanent loan or selling the property for a short-term investor. Whatever you do, you’ll need to do it quickly to avoid extra holding fees.
Getting Your Hard Money Rehab Loan
If you can’t seem to get approval for your home loan, you can go forward with a hard money rehab loan. It’s a bit more work but at the end of things, you’ll have the money you need for another home. Talk to your lender today.
Sources:
5 Strange Things That Can Stop a Home From Ever Selling>Daniel Bortz – https://www.realtor.com/advice/sell/problems-home-sellers-had-to-change-to-sell/
7 Reasons Your Mortgage Application Was Deniedhttps://www.magnifymoney.com/blog/mortgage/7-reasons-your-mortgage-application-was-denied/