WHAT IS AN FHA REHAB LOAN?
Sometimes it pays to refinance and renovate. FHA 203(k) Rehab Loans are perfect for people who want to buy a fixer-upper with an affordable list price. FHA Rehabilitation Loans allow the homebuyer or homeowner to finance the purchase or refinance along with the renovation of a home through a single mortgage.
Rather than applying for many different loans, the FHA Rehab Loan allows the buyer to finance the cost of improvements into the purchase of a home. A Rehab Loan benefits both the borrower and lender- it ensures a long-time loan that covers both the purchase and renovation of the house. The FHA’s 203(k) program is also useful in cases of federally declared natural disasters that cause property damages.
What does this mean about the property?
Properties that are granted FHA Rehab Loans are typically not up-to-date and require renovation to modernize the home. A lot of the time, Rehab Loans are used to help create your own home equity fast by upgrading your home.
Does the property need specific work?
Usually, the property does not need hyper-specific work. These loans are great for fixer-upper homes; the ones that are sold at a low price but require a lot of work to be up-to-date and modernized. Some Rehab Loans are granted to families whose houses have been destroyed or need repair after federally declared natural disasters. A lot of the time after these disasters, people use these loans to rebuild these homes and prepare them for future incidents.
How do you get/qualify for an FHA Rehab Loan?
To qualify for a 203(k) loan, there are a few specific requirements the borrower needs to meet before getting approved.
- Having a FICO credit score that is 580 or higher. Your credit must be in good, if not excellent, standing to be eligible for this kind of loan. Lenders need to know that you will pay them back and having a good credit score gives you credibility for this.
- Your ability to put down a 3.5% down payment. FHA Rehab Loans are great because rather than the up-to 20% down payment you would typically put on the house, you can pay as little as 3.5% upfront and do the renovations needed for your new home.
- Your debt-to-income ratio is less than 43%. To calculate your debt to income ratio take your total debt payment and divide it by your total monthly income. For example, if you have a total monthly debt of $2,000 and a monthly income of $6,000, your debt to income ratio is 33%.
- You must have mortgage insurance and proof of employment and a steady income. If you meet all these requirements, you are eligible for a Rehab Loan.