Rehab loans help real estate investors fund the purchase and renovation of residential properties. They’re used by both short-term investors to fix-and-flip properties as well as long-term investors looking for renovation financing for rental properties. Rehab loans combine a property purchase and rehab costs into a single, short-term loan with quick funding times and interest-only payments.
If you’re looking for a rehab loan, check out LendingHome. They’re a nationwide lender that offers rehab loans to fix-and-flip investors. They offer competitive rates to prime borrowers and can get you pre-qualified online in a few minutes.
2 Types of Rehab Loans
There are generally 2 types of rehab loans; hard money rehab loans and permanent rehab mortgages. Short-term investors use hard money rehab loans to purchase a property quickly, renovate it and sell. Long-term investors also use them to rehab and season a property before refinancing. Permanent rehab mortgages are used solely by long-term investors.
Common Types of Rehab Loans
| Type of Rehab Loan | |
|---|---|
| Hard money rehab loan | Short-term investors who want to fix-and-flip a property; long-term investors who want to rehab and season a property before refinancing. |
| Permanent rehab mortgage | Long-term investors who want to renovate a property and then hold it as a rental. |
There are generally permanent rehab loan options, Homestyle Renovation (HSR) loans and FHA 203(k) loans. However, Homestyle loans only finance a 1-unit investment property and FHA 203(k) loans are only for primary residences. If you’re interested in a long-term rehab loan for investors, check out our article Homestyle loans, otherwise continue reading for a complete breakdown of hard money loans for investors.
Hard Money Loan Rates, Terms & Qualifications
A wide variety of lenders offer rehab loans. Smaller, local hard money lenders will typically offer a wider range of rates, fees, terms, and qualifications because they’re able to work with unique projects and borrowers. National lenders, on the other hand, generally have standardized costs, terms, and qualifications.
Hard Money Rehab Loans at a Glance
Maximum Loan Amount | 75% of ARV |
Interest Rates | 7.5% - 12% (interest-only payments, not fully amortized) |
Points (Lender Fees) | 1 - 10 |
Loan Term | 12 months |
Qualifications | 20% of ARV cash savings 2-3 months personal bank statements Credit score of 550 + (check yours free here) Purchase contract List of past projects Business plan Scope of rehab work Contractor bids or rehab budget Appraisals Upfront costs and fees |
Property Type | Single family home, multi-unit property |
Pre-qualification | As little as 3 minutes |
Time to Funding | As quick as 10 - 15 days |
Learn More | Visit LendingHome |
Hard Money Rehab Loan Rates & Terms
Interest rates on hard money rehab loans generally run between 7.5% – 12%. While this is higher than conventional mortgages, it reflects the additional risk inherent in a rehab project and the short period of time during which interest will be charged. Keep in mind, in almost all cases you’ll be making interest-only payments and repay the full principal at the end of the loan.
Rehab loans rates, fees, and terms typically reflect the following:
- Interest Rates: 7.5% – 12%
- Points: 1 – 10 (equal to 1% – 10% of loan amount)
- Loan Term: 12 Months – 3 Years
- Maximum Loan Amount: Up to 75% ARV (combination of lump sum for purchase price and a credit line for the expected cost of repairs)
Points on a rehab loan are part of the cost of borrowing the money. They are considered either prepaid interest so the lender receives a certain return regardless how soon the loan is paid off, or more commonly, they’re fees such as origination and underwriting that the lender charges for lending the money. They are part of your closing costs and usually range from 1 – 10% of the amount of the loan.
Rehab loans generally have repayment terms of 12 – 36 months. This time frame is usually enough for investors to complete their renovations and execute their exit strategy. However, there is typically no prepayment penalty, letting you pay it off as soon as you’re able and reduce your holding costs.
Most hard money lenders also require specific insurance, such as title insurance and property insurance. Keep in mind that property insurance on a vacant property or one in the midst of a rehab is higher than a typical homeowner’s policy, typically 20%+ higher.
After-Repair-Value (ARV)
Rehab loans combine a property’s initial purchase and rehab budget as a single loan. Hard money lenders typically set a maximum loan amount using a property’s after-repair-value (ARV) ratio. The ARV ratio equals a percentage of a property’s expected fair market value (FMV) after renovations have been made.
When you’re purchasing a property in good condition, lenders typically issue a loan based on the property’s loan-to-value (LTV), usually up to 90% of the initial purchase price. Conversely, when you’re investing in a property that needs renovations, hard money lenders most commonly issue a loan based on a percentage of a property’s expected ARV. In general, the largest rehab loan amount offered by private money lenders is equal to 75% ARV, with many offering less.
The more experienced you are with rehabs and better your credit profile, the higher the ARV will be. This means that investors looking to finance with a rehab loan should expect to cover up to 25% or more of a property’s ARV with their own cash.
Additionally, some lenders, also require that investors pay for renovation costs up front and submit invoices to the lender, after which the lender reimburses the investor for the rehab. It often works like a revolving credit line. This ensures that investors have enough “skin in the game,” thus protecting the lenders from default.
Rehab Loan Qualifications
Qualifications for hard money rehab loans vary, but generally, lenders require some kind of real estate experience, a 25%+ down payment and bank statements. The property also has to be in an area they feel comfortable lending in.
Rehab loan qualifications include:
- Credit score: 550+ (check your credit here for free)
- Down payment: 25% of ARV
- Real estate experience: Lenders prefer to see 1-2 completed projects or a construction background or you need to work with a licensed contractor
- Bank statements: 2 – 3 months of statements that show steady income and a few months of money for reserves
Where to Find Rehab Loans
Rehab loans, also known as hard money loans have a bad reputation, but in fact, many reputable companies offer them and many successful real estate investors use them. Rehab loans can be found at small local lenders, as well as at nationwide online lenders. They’re beneficial for both long-term investors and short-term investors.
For more information on rehab hard money loans, check out our ultimate guide on hard money loans. To find a lender in your state, goto our hard money lender directory.
If you want to quickly find a rehab hard money loan, then goto the nationwide lender, LendingHome. They can pre-qualify you online in a few minutes, fund you within 15 days and they offer competitive rates for prime borrowers.
Six Steps of Renovating a Property Using a Rehab Loan
Let’s take a look at the 6 steps to renovating a property with a rehab loan. This should give you a good understanding regarding what to expect during the hard money rehab loan process. We will discuss what you need for the prequalification stage, as well as how you get to closing and then flip the property.
How to renovate a property with a rehab loan in 6 steps:
1. Get Pre-Qualified with a Hard Money Lender
Hard money lenders usually have a pre-qualification process that helps investors determine an expected ARV ratio, costs, fees, and other terms. The pre-qualification process takes a few minutes, is non-binding, and allows real estate investors to move forward with confidence that financing for their project is available.
In general, you can expect to provide the below information during pre-qualification:
- Personal Bank Statements: 2-3 Months of Personal Bank Statements
- Personal Credit Score: 550+ (check your credit here for free)
- Basic Questions: A few questions about you and the potential property, like the desired property’s address, the expected offer amount, and your name and tax ID (either a person or entity).
You provide the lender with your financial information and the address of the property you’re considering and they will check your credit score and make a determination if they can offer you pre-qualification. If they can, you will move onto the loan approval process.
With an online rehab loan provider, like LendingHome, pre-qualifying will take just a few minutes and you’ll be presented with several loan options. While the loan terms aren’t set in stone, these prequalified rates and terms allow you to know whether financing is likely to fit your project parameters.
2. Receive Approval for a Hard Money Rehab Loan
After you’re pre-qualified for a rehab loan, it’s time to work on getting a final approval for the loan. You will need to narrow down your property search to a specific property if you haven’t already done so and you need to prepare documents such as your purchase contract and list of past projects.
You’ll already know your maximum loan amount so this will narrow down your property search. Once you’ve found the right property, make an offer and the lender will work on underwriting your loan approval after they receive your signed purchase contract. Keep in mind that the lender will need to approve each additional property that you find, even if you’re already pre-qualified for 1 particular property.
If you need more information on choosing a neighborhood and selecting a property to flip before you get a rehab loan, then check out our guide on finding a property to flip in 5 steps.
Then you will need to prepare the following to get loan approval:
Purchase Contract
After you’ve made an offer on the property, send the purchase contract to your lender. This can be done via email or fax. Then you will fill out loan application paperwork and pay an application fee, if applicable. This is usually a few hundred dollars. You may also be asked to submit proof of prior rehab experience and a renovation budget for the property you made an offer on.
Purchase contracts are standard documents that hard money lenders will want to see. It will state the agreed upon final sale price and the terms of the purchase between the buyer and seller. In most cases, the agreement will be signed by the buyer and seller and usually stipulates that the purchase is contingent “on lender approval.”
Property Appraisals
The rehab lender orders their own appraisal to determine the property’s current fair market value as well as its expected ARV. Most hard money lenders have an approved list of appraisal companies or in-house appraisers.
When completing your application, the lender usually conducts two appraisals as part of their due diligence: an “as-is appraisal” and an “ARV appraisal.” These two appraisals will tell a lender current fair market value of a house as well as the expected value after all renovations have been made. Appraisals are typically paid for by the borrower upfront.
List of Past Projects
One of the most important things a hard money lender uses to assess rehab loan applications is an investor’s past rehab experience. If you expect to complete your renovations yourself, lenders like to see investors with at least 2-3 projects under their belt.
To prove your past projects, lenders often require prior purchase agreements, rehab invoices, and a receipt of sale or proof of refinance for each project.
If you’re a new investor looking for a hard money rehab loan and aren’t going to make the improvements yourself, you can work with a licensed contractor in lieu of experience. In this case, hard money lenders will want additional information on the contractor, which includes the company name, license number, scope of rehab work, overall bid, and timeline for completion.
Scope of Rehab Work
The scope of a rehab should detail what renovations you plan to do. A property’s expected scope of rehab work is important because it helps determine its ARV. The scope of rehab work can either be determined by yourself if you’re an experienced rehabber or by a contractor if you’re inexperienced. This is also where you figure out your rehab budget.
Lenders will typically require a contractor perform the work if it’s a complex rehab project but let you do your own renovations if the project’s simple. If you’re using a contractor, the scope of rehab work is typically included in his or her bid. If you’re doing the rehab yourself, you can prove the scope of work with materials estimates as well as a time for completion.
Contractor Bids
For inexperienced rehabbers and fix-and-flippers, lenders will require contractor bids as part of the scope of rehab work. This helps determine the cost of the expected rehab, which, when coupled with the scope of work and timeline (also provided by a contractor), is used to calculate a property’s ARV in the ARV appraisal.
For experienced rehabbers doing their own work, the scope of work and expected budget suffices. There’s no need to engage contractors in this case.
3. Get Financing
If the lender has decided to move forward with the deal, they will give you a breakdown of their fees, interest rate and a closing date. If you accept the terms of the rehab loan, then the loan will be funded. However, you usually won’t receive the full amount of the loan in 1 payment.
Lenders typically send the initial loan payment directly to an escrow or settlement service company that distributes the funds to the seller and transfers title ownership. Generally, funding takes 10 – 15 days for the purchase price itself.
Then, the lender will distribute any rehab funds in draws. So, basically, the lender pays for the acquisition cost of the property with one check and the renovation costs will be paid to you separately as the work is completed.
If the flooring budget is $10,000, for example, you may get half of that when it’s time to install the floors and half when they’re done. Each lender does things a little differently but it’s rare that a lender will give you all of the rehab money up front. Typically, you get a credit line for rehab costs and you have to submit invoices before you get the funds. Make sure your contractor knows this so he/she can expect net terms, otherwise you’ll have to cover the costs out of pocket and wait for reimbursement.
4. Purchase the Home to Flip
Once the rehab loan is approved, the title company runs a title search and orders title insurance, which is required by the lender. Your rehab lender or real estate agent can recommend a title company and they all provide the same services at generally similar costs.
You will receive the closing costs from your lender and they will let you know how soon they can close on the loan and then the title company will schedule the date, time and location of closing. It’s often done at their office so printing and copying is easy and checks will already be there for distribution. Once the closing is over, you will have ‘title’ to the property, meaning the deed is in your name and the property is officially yours.
Remember that the total purchase costs don’t stop with lender points and application fees. Purchasing a property also means covering the closing costs, usually between 2% – 5%. At the average of 3.5% and assuming that the property is $120,000, you will have to pay an additional $4,200 in closing costs, equal to:
($120,000 purchase price) x (3.5% closing costs) = $4,200
5.Carry out Necessary Renovations
Now you can get started on your planned renovations. Remember, the renovations should be done right, but they should also be done in a timely fashion because the longer you hold onto the property, the higher your carrying costs and the lower your profit. You should have a renovation timeline, for example, 60 days.
The lender will have told you upfront how they will fund your renovations. Keep in mind, you need to inform contractors up front how and when they will be paid and this is dependent on how the lender distributes the funds. If you need to cover the rehab costs, you can use either cash savings, float the costs on credit cards, or negotiate net payment terms with contractors or suppliers.
At the end of the rehab, you should have received your entire renovation budget from the lender. This will be in the form of draws or in a lump sum once you show contractor invoices and receipts of completed work. At this point, you can replenish your savings, pay off credit cards, or pay contractor/suppliers.
However, during the rehab, you will be required to make monthly “holding cost” payments, which are costs that add up while you rehab your property. The first of the holding costs are the monthly, interest-only payments to the rehab lender, which we illustrate in the example below:
($130,000 loan amount) x (10% interest) / 12 months = $1,083 monthly interest payments
Multiple $1,083 x 2 and you get $2,166 for the two months you spend completing the rehab.
During the rehab, you will also have to cover any property taxes and utilities. If property taxes are 2% and utilities are roughly $100 per month, you can expect additional holding costs of:
$333 property taxes + $100 utilities = $433 per month
Multiply this number by two and add it to the $2,166 in interest payments, and you get $3,032 in monthly holding costs while you rehab the property. Keep in mind that this doesn’t include your rehab costs and also doesn’t include any landlord and/or homeowners insurance premiums.
6. Exit the Property (Sale or Refinance)
Now, you have successfully renovated your property and need to proceed with your exit strategy. This will be through refinancing into a permanent loan (for a long-term investor) or selling the property for a profit (for a short-term investor).
Fix-and-flippers will want to sell the property as fast as possible to avoid incurring additional holding costs. Long-term investors looking to buy, hold, and rent will want to find a renter and refinance into a conventional mortgage equally fast. Either way, the goal is to pay off the hard money lender.
Having a renter in the property for 6+ months is referred to as seasoning and some lenders require it before they will make a loan on an investment property. Unfortunately, exit strategies can take time. It may take 2 months to either sell the property or find a renter and refinance to a conventional mortgage. During this time, the investor continues to incur additional holding costs.
If you’re looking for a long term investment property loan to refinance your hard money loan, then head over to Visio Lending. Their rates are competitive for prime borrowers and they can pre-qualify you in a few minutes. Contact them today for more information.
Bottom Line
Rehab loans are great for fix-and-flip businesses and for buying rental properties that need a little work done. Rehab loans offer investors a short-term loan with interest-only payments, quick approval times, and facilitate both the purchase of a house and the renovation financing in a single loan.
If you’re ready to begin your next rehab project, check out LendingHome. They can get you pre-qualified online in just a few minutes and they offer competitive interest rates for prime borrowers.
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