Finding the perfect home for clients is daunting in this tight real estate market. Buyers naturally want the nicest house in the best neighborhood that they can afford. But, finding a home that meets most of their wish list items is very difficult in southern Nevada. They are often forced choose between buying a 20-year-old house with a large yard and buying a new home with updated décor and amenities but less square footage and a smaller lot. For some, buying an existing home with a Rehab loan is the perfect solution, allowing them to buy a larger existing home and updating it with today’s finishes like modern flooring, spa-like bathrooms, solar energy, new windows, pools, and open floor plans. Popular television shows like Flip this House, Property Brothers, and many others show the potential transformations that can be achieved with the right vision, contractor, and budget.
But, these updates carry hefty price tags. For most buyers, a rehab budget of $50,000 to $500,000 is beyond their means. That’s where rehab loans come in. Clients can borrow money to purchase a home with additional funds for the rehab of the home, as well. The great part is that Lenders use the upgraded value of the home when calculating the amount of money they will lend.
There are several types of Rehab loans that are common in the market.
FHA – 203k loans from FHA have a modest county loan limit ($294,515 in Clark County for single-family homes). The advantage of FHA loans is that they only require 3.5% down, but they definitely have disadvantages. As noted, FHA rehab loans have fairly low limits and adding a pool and other luxury items are prohibited). Another disadvantage of FHA 203k loans is that they are only allowed on homes which will be a primary residence. Lastly, FHA rehab loans have expensive up front and monthly mortgages insurance. FHA loans are only available for primary residences.
Fannie Ma – Fannie Mae offers its Homestyle rehab loans which can include pools and other luxury items (within reason). The Clark County loan limit for these loans $453,100, so these cover a larger percentage of real estate transactions. The minimum down payment for Homestyle loans is 3% but note that monthly mortgage insurance is required for loans with less than 20% down. Fannie Mae loans also require a bit higher credit score and lower debt-to-income ratio than FHA loans. Homestyle loans are available for investment properties, second homes, and primary residences.
Portfolio – To go beyond the Fannie Mae and FHA loan limits for Rehab loans, portfolio loan products can be used. Loans for rehab home purchases are available up to $2 million. Both the Fannie Mae Homestyle and Portfolio products can be used for investment properties. Most of these loans require 20% down. Portfolio loans are available for investment properties, second homes, and primary residences.
Each of these loan products has various restrictions, costs, and protocols. For instance, they all require a scope of work with itemized costs for each line items (i.e., flooring, paint, cabinets, appliances, etc.).
Interest rates for these types of loans are usually only fractionally higher than a traditional purchase loan, but additional fees may apply. Request a full Loan Estimate before embarking on this type of loan.
Local Real Estate Agents are catching on to this trend and partnering with Loan Officers to help their clients to envision the possibilities of creating their dream home despite not being able to find it.
A home inspection is a great place to start for a potential rehab home. Finding a home with fewer functional and structural issues leaves more room in the budget for the features and design elements that are more enjoyable than a new roof or furnace.
Clearly, there are limiting factors, as these loans are not a blank check. The improvements and subsequent value should be common in comparable homes nearby. For instance, adding a few hundred square feet in a typical neighborhood would be acceptable, but thousands of square feet typically wouldn’t make sense.
Energy efficiency, accessibility, safety, and items that increase value are especially attractive to rehab loan underwriters. For client’s wishing to add an elevator, ramps, walk-in baths/showers, solar power, energy efficient windows are great examples of ways to help clients improve their home, allowing them to live in it well into their retirement.
Whether your client wishes to improve energy efficiency, update décor, build or update a pool, remodel a kitchen, or add square footage, the right vision might give them their dream home at a price that they can afford.