Do you need a rehab loan for your upcoming home purchase? If so, it will help to know the following things about rehab loans that make them unique.
When Rehab Loans Are Used
A rehab loan is used for a home that you are purchasing where there are known problems or improvements will be made, not homes that are move-in ready. There may be a roof that needs to be repaired, a septic tank that is having problems and needs to be replaced, or improvements that need to be made to the home in some way. Rather than pay for these repairs out of pocket, the costs can be rolled into your home loan and paid off over time.
Why Rehab Loans Are Used
You may be wondering why a lender would allow you to get a rehab loan to purchase property that needs so much help. This is because lenders do not want to purchase properties that are in bad shape, but a rehab loan ensures that the repairs are going to be made. Not only are you getting the money to make the repairs, but the work must be done by a qualified professional. This is to ensure that the home is repaired properly and that you don't default on a mortgage with a dilapidated home that then goes to the bank to sell.
How The Rehab Money Can Be Used
Be aware that the money you receive for a rehab loan must be used for renovations that will repair the property in ways that will add value to the property. This includes adding an addition to the home, finishing a basement, or upgrading an old kitchen that is incredibly outdated. You cannot use a rehab loan to add luxury to your home, such as adding a swimming pool or a hot tub. Even though these things may add value to the home, unnecessary luxury items are not allowed.
How Standard And Limited Rehab Loans Are Different
Know that there are two types of rehab loans. A limited rehab loan is only going to allow you to do those minor repairs that do not alter the structure of the home. However, the limited nature of the repairs means that you do not need additional paperwork before and after the repair is done to ensure it was done correctly. A limited rehab loan also has a much smaller cap on how much money can be included in your loan specifically for repairs.