An investor who is interested in rehabilitating a building for any purpose often requires borrowed capital. The purpose of this capital is to give the investor the money he or she needs to complete the project quickly. For example, if you are investing in a rental property that requires extensive repairs, a rehab loan gives the borrower the money he or she needs to make these repairs. Once the repairs are complete, the borrower can begin renting the property and making a profit. Rehab loans are also ideal for fix-and-flip situations.
Regardless of the reason for the loan, borrowers needing loans for rehabilitation purposes often need to work with hard money lenders.
What Is a Rehab Loan?
A rehab loan isn’t the same as a conventional mortgage. Unlike a conventional mortgage, rehab loans aren’t available from every lender. In order to obtain a rehab loan, borrowers must find a lender who specializes in this type of financing. In many cases, lenders who advertise private commercial loans offer hard money financing.
What Is a Hard Money Loan?
Like a conventional mortgage, a is a loan secured by real property. However, hard money loans don’t conform to the same requirements as a conventional mortgage. As a result, they are often easier to qualify for. Because hard money loans represent a greater risk for the lender, they typically feature higher interest rates to compensate. Nonetheless, hard money loans are an excellent option for borrowers who need non-traditional financing.
Qualifying for a Hard Money Rehab Loan
Qualifying for a hard money loan is often easier than qualifying for a traditional mortgage. However, to qualify for a hard money rehab loan, borrowers will still need to provide the lender with certain information and meet certain requirements. Because the loan involves an existing property that needs repairs, the borrower will need to provide information about the current value of the property, the intended repairs and the estimated value of the property when the rehabilitation is complete.
Borrowers will also need to submit to a credit check and provide documentation of income and assets.
Because rehab loans are intended to improve the value of the property that secures them, the maximum loan amount is often higher than the property’s current value. Borrowers can learn more about the maximum loan amount available by discussing the specific property with their lender.
Hard Money Rehab Loans versus an Owner-Occupied Loan
Most conventional mortgages are owner-occupied loans, which means that the borrower intends to reside at the property securing the mortgage for at least 12 months after closing. In general, hard money rehab loans are geared toward borrowers who intend to use the property for business or investment purposes after completing the repairs. However, in some cases, it may be possible for a borrower to qualify for an owner-occupied hard money loan. Borrowers should discuss this issue with the lender to learn more about the options available. In cases where a borrower intends to occupy the property in question, a different type of mortgage may be preferable.