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What is a Rehab Loan?

If you love watching those flip or flop shows that take dilapidated or outdated properties and turn them into gems that make a profit on the real estate market, then you might be wondering how to get the money to do something like this in your own home town.  Rehab loans are a niche type of loan offered by rehab lenders, also known as hard money lenders.  Typically there is a lot more for borrowers to understand with these types of loans than with traditional loans you get from a local bank.

First of all, there is more than one type of rehab loan even if they all work toward achieving the same purpose;  to renovate a property and increase its price on the real estate market. To learn more about this niche loan before applying for one, consider the following:

Purchase price: The rehab lender will only offer a rehab loan based on the amount you purchased the property for, not what you think it will be worth after you make improvements.  The lender does this to protect himself in the event you never move forward with the renovations.

Risk: When it comes to getting a rehab loan, the lender will determine the risk level before giving you an answer or an amount.  The higher the profit the renovation can make, the better the risk for the rehab lender.  Also, the riskier a project, meaning it requires a lot of work to make a profit, the lower loan to values ratio.  On the other hand, a property that simply needs some fresh paint, new carpets, and a few other cosmetic details fetches a much lower risk for the lender.

Personal finances: The rehab loan lender will take a good, hard look at your personal finances before making a decision.  The stronger your finances, the more likely the lender will approve your project, especially if you’ve done this before. If this is your first time applying for a rehab loan consider getting an equity partner to help you get started and build a reputation.  Having collateral such as cash in the bank, stocks, or real estate could also give you an edge when trying to secure a rehab loan.

Prepay Penalties: Rehab lenders want to make money on your loan. For that reason, many of them incorporate prepay penalties into their contracts.  When you borrow funds, the lender expects you to use them over a specified period during which the lender collects interest.  If you  too early, the penalty could be as much or even more than the accrued interest.

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