A conventional rehab loan is a type of mortgage that allows homeowners or buyers to finance the cost of home improvements or renovations. This loan can be used to purchase a new property that needs repairs or to refinance an existing property and include the cost of renovations in the loan amount. In this article, we will explore the details of conventional rehab loans, their benefits, eligibility requirements, and provide some tips for obtaining one in 2023.
What is a Conventional Rehab Loan?
A conventional rehab loan, also known as a Fannie Mae HomeStyle Renovation loan or a Freddie Mac CHOICERenovation loan, is a mortgage that combines the purchase or refinance of a home with the financing of home improvements. This loan allows borrowers to borrow funds based on the future value of the property after renovations are complete.
Benefits of Conventional Rehab Loans
There are several benefits to using a conventional rehab loan:
- Flexible financing options: Conventional rehab loans offer flexible financing options to cover the purchase price and renovation costs.
- Potential for increased property value: By using a rehab loan to make improvements, homeowners can increase the value of their property.
- Streamlined loan process: Conventional rehab loans simplify the financing process by combining the purchase or refinance and renovation costs into one loan.
To qualify for a conventional rehab loan, borrowers must meet certain eligibility requirements:
- Minimum credit score: Lenders typically require a minimum credit score of 620 or higher.
- Loan-to-value ratio: The loan-to-value ratio, which compares the loan amount to the appraised value of the property, must meet the lender’s guidelines.
- Debt-to-income ratio: Borrowers must have a debt-to-income ratio within the acceptable range set by the lender.
- Reserve requirements: Lenders may require borrowers to have a certain amount of cash reserves after closing the loan.
Tips for Obtaining a Conventional Rehab Loan in 2023
Here are some tips to help you secure a conventional rehab loan in 2023:
- Work on improving your credit score: A higher credit score can increase your chances of qualifying for a rehab loan and getting a favorable interest rate.
- Save for a down payment: Lenders may require a down payment for a conventional rehab loan, so it’s important to save up the necessary funds.
- Research lenders and loan programs: Different lenders may have different loan programs and eligibility requirements, so it’s important to shop around and find the best fit for your needs.
- Get pre-approved: Getting pre-approved for a rehab loan can give you a better idea of how much you can borrow and make the homebuying process smoother.
- Work with experienced contractors: When planning your renovations, it’s important to work with experienced contractors who can provide accurate cost estimates and complete the work to a high standard.
FAQs about Conventional Rehab Loans
1. Can I use a conventional rehab loan to purchase a fixer-upper?
Yes, a conventional rehab loan can be used to finance the purchase of a fixer-upper property and cover the cost of renovations.
2. How much can I borrow with a conventional rehab loan?
The maximum loan amount for a conventional rehab loan is typically based on the appraised value of the property after renovations are complete.
3. What types of renovations can be financed with a conventional rehab loan?
Conventional rehab loans can be used to finance a wide range of renovations, including kitchen and bathroom remodels, room additions, and structural repairs.
4. Is mortgage insurance required for a conventional rehab loan?
Mortgage insurance may be required if the loan-to-value ratio exceeds a certain threshold. However, some borrowers may be able to avoid mortgage insurance by making a larger down payment.
5. Can I use a conventional rehab loan for investment properties?
Yes, conventional rehab loans can be used for investment properties, as long as the property will be used as a primary residence by the borrower or a family member.