In today’s market, rehab loans are much more acceptable than in the last couple of years when the market was too fast paced to handle them. This means you can buy undervalued homes, wrap the renovation costs into the loan, and fix the home you want.

 

Two rehab loan options are FHA 203K and Fannie Mae Homestyleloans. Here’s how they work.

 

FHA 203K Loans

The most popular rehab loan option is the FHA 203K loan. This government-backed loan offers flexible underwriting guidelines, and you can borrow up to 110% of the home’s value after renovations. This is how you can wrap the cost of the renovations into the home. Here’s how it works.

 

You borrow the full amount of the loan upfront. Then, the lender disburses the funds for the purchase to the seller and all other interested parties. Any money left for renovations sits in an escrow account. You provide the lender with the contractor’s contract regarding the work, timeline, and cost. The lender disburses the funds as agreed based on the timeline and inspection of completed work.

 

Allowed Renovations on a 203K

But what renovations can you do with a 203K loan? Here’s a simple list:

• Structural changes – This includes almost any type of renovation that affects the walls (adding or removing), new or repaired roof, foundation repairs, and other structural     changes to improve the property’s value and function.
• Energy efficient changes – You can make a home more energy efficient by replacing the windows and doors, adding insulation, or upgrading the HVAC systems to reduce energy costs and make the home more environmentally friendly.
• Room additions – You can add rooms onto the home, such as a bedroom, bathroom, finished basement, or garage. You can even knock down and rebuild and entire section of the home.
• Convert a single-family to a multi-family home – You can convert a home from one unit to several or vice versa.
• Improve landscaping and curb appeal – You can add decks, patios, or terraces. You can also completely renovate the exterior landscaping
• Make the home accessible – You can make the home wheelchair or elderly accessible with ramps, grab bars, or remodeling the kitchen or bath for more accessibliy.
• Cosmetic changes – Any cosmetic changes may be included, such as repainting the interior or exterior, adding new flooring, replacing fixtures, adding stair railings, or even changing the siding.

FannieMae Homestyle Loans

Fannie Mae also offers a conventional version of the rehab loan. Like standard conventional loans, there are stricter qualifyingrequirements, such as higher credit scores and lower debt-to-income ratios.

 

However, Fannie Mae Homestyle loans have a few more allowances than FHA 203K loans.

• You can use the loan on any property – FHA 203K loans are only allowed on homes you will occupy full-time as your primary residence. HomeStyle loans, on the other hand, can be used on vacation homes, second homes, and ivnestmnt poprerties. This opens up more possibilities when you want to increase your real estate portfolio.
• You can DIY renovations –  If you have the skills to DIY certain renovations and can prove it, some lenders allow it. However, you are usually limited to renovations that cost no more than 10% of the property’s after-repaired value. Also, if the DIY renovations exceed $5,000, they must be inspected before funds are disbursed.

Renovation loans are a great way to buy undervalued homes and make them what you want. You’ll have the funds to increase the home’s value without depleting your savings. Of course, the lender will have some say in how everything occurs, and everything must meet their requirements, but it can be a great way to save money on a home and make it what you want.

Sellers today are more willing to accept these programs because homes aren’t selling as fast as they were a couple of years ago. So it’s a great time to consider increasing your real estate portfolio at affordable prices.

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