Purchasing a home in need of repairs can be a bargain, but it’s also an investment. The average fixer upper costs $173,221 to purchase and $111,631 to renovate. 

Is this investment within your reach? In fact, with a home rehab loan, it is.

Find out more about home rehab loans and how to get approved for one here.

What Is a Home Rehab Loan?

A home rehab, or home renovation loan, allows homebuyers to borrow enough money to purchase and renovate a property in need of repair. Current homeowners can also use these loans to simultaneously refinance and renovate their current homes.

The most common type of home rehab loan is the FHA 203(k) loan. Backed by the Federal Housing Administration (FHA), these loans serve two key purposes:

  • Increasing homeownership opportunities
  • Contributing to neighborhood revitalization efforts

For home buyers and owners, rehab loans simplify the financial side of what can be a complicated home renovation process.

With a rehab loan, buyers and owners avoid the hassle and guesswork of applying for multiple loans. Instead, they apply for a single loan in a streamlined process.

How Do You Get Approved for a Home Rehab Loan?

So what does the home rehab process look like, and how do you get approved? Home rehab loan eligibility depends on property and borrower criteria.

Property Requirements

To qualify for a home rehab loan, a property must be primarily residential. One- to four-unit residential properties are eligible for FHA 203(k) loans.

Eligible properties, of course, must require significant repairs. The FHA has established two types of 203(k) loans.

The Limited 203(k) Mortgage is for homes that don’t need structural repairs. With this type of loan, homeowners can finance up to $35,000 worth of repairs.

The Standard 203(k) Mortgage, in contrast, is for properties requiring more extensive repairs. This program sets no universal upper limit on repair costs. However, the total mortgage cannot exceed FHA lending limits in the area.

Borrower Requirements

Home rehab borrowers must meet several additional requirements.

First, borrowers must live in—or plan on living in—the home. This criterion makes rehab loans an especially valuable tool for house hackers. House hacking, combined with home rehab financing, can be a very lucrative investment strategy. (If you’re unfamiliar with the strategy, find out more in this helpful house hacking 101 guides!)

Second, borrowers must meet the lender’s financial requirements, which include:

  • A FICO credit score of at least 620
  • A maximum debt-to-income ratio of 31/43
  • The ability to make at least a 3.5% down payment

To meet these requirements, borrowers must be prepared to submit several forms of documentation. For example, you can expect to submit proof of income along with written repair estimates from licensed contractors.

What Else Should You Know Before Applying for a Home Rehab Loan?

If you apply for a home rehab loan, you should be ready to get to work quickly. The program requires borrowers to begin renovations within 30 days of closing. It also requires all work to be completed within six months.

Home Rehab Loans: Remodel Your Home, Your Finances, and Your Future

Home rehab loans align your homeownership goals and financial goals, bringing both within reach.

As you strive to meet all of your life goals, count on our blog for the best advice.

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