When deciding to rehabilitate a home, many factors come into play. The first and foremost is how to obtain the funds to finance construction. Many have heard the term “rehab loan,” but few truly understand the intricacies of the process.
Unless you are in the small range of people able to front all cash for a construction project, applying for a loan is a smart move. These loans can fund various aspects of a rehab, including materials, labor, and even the cost of the land itself! The downside is that they can be complicated to obtain since the money is being borrowed on something that doesn’t yet exist. Most traditional bank and finance institutions prefer assurances that the house can be built and/or rehabilitated on budget and on time. That means if you are planning to take out a rehab loan, make sure to have a basic construction schedule, benchmarks for progress, and end goals for your project to help streamline the process.
In all construction loans, money is disbursed by the lender based on a pre-established draw schedule, estimated money upon completion of the foundation, estimated money upon completion of the of rough frame, and so on. Because construction loans are typically interest-only, you pay solely on the money that has been disbursed. As progress is made, your loan payments grow and more money is released. When the home is completed, the total amount borrowed during the construction loan automatically converts to a permanent mortgage. Most construction loans are issued by banks, not mortgage companies, as the loans are typically held until the building is complete.
There are two basic types of construction loans available to investors looking to flip properties: one-time close loans and two-time close loans.
One-time close construction loans are most commonly used by investors. Also known as all-in-one loans or construction-to-permanent loans, this preference combines the construction costs for and mortgage on the completed project into one. One approval process and one closing make this the simplest option, while reducing closing costs. When choosing this type of loan, the borrower can select suitable terms from a portfolio of options provided by the lender such as 30-year fixed, various ARM’s (adjustable rate mortgages), or “float-down”.
A two-time close loan is two separate loans bundled together; a short-term loan for the construction phase plus a separate, permanent mortgage loan on the completed project. Because of the two loan settlements, closing costs on this type of loan are greater. On the plus side, you chance a better rate on the mortgage as refinance rates are typically more competitive than rates offered in one-time closing loans.
A rehab loan is a great option for investors looking to fix and flip a property in a short period of time. As hard money lenders serving Western Washington, Intrust Funding funds rehab projects every week. If you’re interested in learning more about this process or if you have any questions, just give us a call to speak with a professional loan consultant. At Intrust Funding, our borrowers are our partners, and our portfolio manager has a >98% accuracy on ARV projections. Our loans are the most secured in the industry, because our expert underwriting guarantees you are getting a good deal.