In today’s market, rehab loans are much more acceptable thanthe last couple of years when the market was too fast paced to handle them.

 

This means you can buy undervalued homes, wrap therenovation 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 intothe home.

 

Here’s how it works.

 

You borrow the full amount of the loan upfront. Then, thelender disburses the funds for the purchase to the seller and all otherinterested 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 thetimeline and inspection of completed work.

 

Allowed Renovations on a203K

 

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

 

·      Structural changes – This includes almost any type of renovation that affects the walls (adding or removing), new or repairedroof, foundation repairs, and other structural changes to improve theproperty’s value and function.

 

·      Energy efficient changes – You can make a homemore energy efficient by replacing the windows and doors, adding insulation, orupgrading the HVAC systems to reduce energy costs and make the home moreenvironmentally friendly.

 

·      Room additions – You can add rooms onto thehome, such as a bedroom, bathroom, finished basement, or garage. You can evenknock 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 canadd decks, patios, or terraces. You can also completely renovate the exteriorlandscaping.

 

·      Make the home accessible – You can make the homewheelchair or elderly accessible with ramps, grab bars, or remodeling thekitchen or bath for more accessibliy.

 

·      Cosmetic changes – Any cosmetic changes may beincluded, such as repainting the interior or exterior, adding new flooring,replacing fixtures, adding stair ralings, or even changing the siding.

 

Fannie Mae HomeStyle Loans

 

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

 

However, Fannie Mae HomeStyle loans have a few moreallowances than FHA 203K loans.

 

·      You can use the loan on any property – FHA 203Kloans are only allowed on homes you will occupy full-time as your primaryresidence. HomeStyle loans, on the other hand, can be used on vacation homes,second homes, and ivnestmnt poprerties. This opens up more possibilities whenyou want to increase your real estate portfolio.

 

·      You can DIY renovations – If you have the skillsto 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 theproperty’s after-repaired value. Also, if the DIY renovations exceed $5,000,they must be inspected before funds are disbursed.

 

 

Final Thoughts

 

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 valuewithout depleting your savings. Of course, the lender will have some say in howeverything occurs, and everything must meet their requirements, but it can be agreat way to save money on a home and make it what you want.

 

Sellers today are more willing to accept these programsbecause homes aren’t selling as fast as they were a couple of years ago. Soit’s a great time to consider increasing your real estate portfolio ataffordable prices.

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