What is a Rehab Loan?
A rehab loan or FHA 203(k) loan is a form of financing that allows homebuyers who are considering purchasing a fixer-upper that requires multiple repairs and significant rehabilitation efforts to roll the cost of both the property and these projects into one loan. A Rehab Loan benefits borrowers, as well as lenders, since it insures a single, long term loan–whether its a fixed-rate or ARM– that covers the purchase/refinance and renovation of a home.
Especially in today’s market where inventory is low keeping affordability at arms-length for some borrowers, a rehab loan can be a great option. It allows a borrower to purchase a home in a lower price range that needs some repairs while financing those repairs over a period of time.
Eligible Rehabilitation Activities
There are limitations and restrictions on the amount, types, and costs of rehabilitation covered under the FHA 203(k) Rehabilitation Loan, which range from relatively minor expenses, to virtual reconstruction of the property. For example, the cost of renovation must be at least $5,000. Whereas on the high end, a property that has been demolished or will be razed as part of rehabilitation is eligible under 203(k), provided that the existing foundation remains in place.
According to the US Department of Housing and Urban Development, the types of rehabilitation that borrowers may make using Section 203(k) financing include:
- Structural alterations and reconstruction
- Modernization and improvements to the home’s function
- Elimination of health and safety hazards
- Changes that improve appearance and eliminate obsolescence
- Reconditioning or replacing plumbing; installing a well and/or septic system
- Adding or replacing roofing, gutters, and downspouts
- Adding or replacing floors and/or floor treatments
- Major landscape work and site improvements
- Enhancing accessibility for a disabled person
- Making energy conservation improvements
HUD also requires that properties financed under this program meet certain basic energy efficiency and structural standards.
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