Helpful Hints

How to Finance Your Fixer Upper with Rehab Loans

August 5, 2019

Whether you are in the business of flipping houses or you are looking for a fixer upper for your personal home, financing can be tricky. In many cases a traditional mortgage isn’t the best option for buyers who plan to do extensive renovations on a property. Rehab loans are a great option for buyers who plan to renovate a property, whether they plan to live in it, or turn around and sell it. Let’s take a closer look at rehab loans and how they work.

What is a Rehab Loan?

A rehab loan is simply a loan from the bank that covers the cost of the property as well as the cost of repairs. This amount is determined by the cost of the property as well as the renovation estimates given by the contractor who will complete the renovations. This type of loan can only be used for renovations to the interior or exterior of the home that will raise the home’s value. Luxury items such as extravagant swimming pools, etc. are not covered in this type of loan.

Once the amount of the loan is determined and settlement happens on the property, the money is then used by the contractor to complete the work. Because of this home renovations take place after closing on the home, whether they be structural renovations or cosmetic renovations.

Who Benefits from a Rehab Loan?

Buyers who want to break into a real estate market that is slightly out of their price range may benefit from rehab loans because they allow them to purchase a lower priced home that isn’t move in ready. Likewise, investors or flippers may benefit from rehab loans because they can quickly flip the property and turn around to see it for more money. There are other financing options available for flippers and investors however, such as hard money loans, so rehab loans are more typically used by homeowners who want to renovate a property to live in.

Things to Keep in Mind

Rehab loans will only include the amount of money that was estimated by the contractor, so it is possible it will not be enough to complete the job. Whether the contractor gave a bad estimate, or more problems were discovered during construction, it is possible that homeowners could run out of renovation money. It is also important for homeowners and flippers to pay close attention to the other homes in the neighborhood. It is never wise to be the most expensive home in the neighborhood, and over-renovating could end up making your home not fit in with the neighborhood market.

Purchasing a home is a huge decision, and deciding to invest in a fixer upper is an even bigger commitment. Financing for a fixer upper doesn’t have to be complicated with a rehab loan. At Maryland Private Mortgage we specialize in rehab loans in Baltimore and we’d love to help you with your fixer upper. To speak with a professional, give us a call today!