Very few banks will finance a rehab loan. Often, a hard money lender is the only lender that will finance this type of project.
Banks are generally uncomfortable lending on vacant properties that will be used as a fix and flip project. Truthfully, even if a conventional bank agreed to finance on a rehab, it makes little sense. Mortgages are long-term; and although they are low-interest rate, you are stuck in one for 20 plus years, unless you pay a stiff early payoff penalty fee.
Hard money lenders typically have terms of 18 months or less and interest rates from 7.99% to 18%, with anywhere from 2 to 5 points. Rather than paying the points at the closing, as with a conventional mortgage, with a hard money rehab loan, you may not have to pay the points until the home sells (after rehab is complete).
Hard money lenders base the borrowed amount on the properties after-renovation value (ARV). This will typically leave the borrower with cash left over after purchasing the property. This leftover money goes to lender fees, rehab costs, marketing and real estate. If you can create a budget and stick to it, it is highly feasible you will have no out-of-pocket money to flip your property.
Every individual hard money lender has their own set of requirements necessary to close a rehab loan. This list below will give you a general idea of specific items you should have when meeting with a potential lender:
Photos: Take photos of the property to show your lender. Be sure to take photos of the areas where rehab is needed. For example, if the carpets are destroyed and you are planning on renovating with hardwood, have photos of the carpets.
Purchase Contract & Escrow Instructions: If you need a loan to purchase and rehab the property, make sure you have these documents for your lender.
Repair Bids: Your lender needs to see all the repair bids.
Proof of Hazard Insurance: You won’t have purchased this insurance yet but be sure to have a quote for hazard insurance.
Preliminary Title Report: This will always be on every hard money lender’s list of required documents. If you have one available, make sure to bring it to your lender. If not, please confirm with your lender that it is alright to use your designated title company or the seller’s title company before ordering one.
Unlike banks, which look at your FICO score and credit-worthiness, hard money lenders make decisions based on the strength of the proposed deal and the reliability of the borrower when considering a rehab loan.
In evaluating the borrower, hard money lenders don’t concern themselves with debt-to-income ratios and credit scores, like conventional banks. However, when considering a hard money rehab loan, lenders will want to see documents such as: bank statements, tax returns and a credit report. The borrower will be the owner and hold the deed to the property. The hard money lender will hold the first-position lien; and in case of default of the rehab loan the lender can foreclose, take ownership of the property and sell it on their own.
If you are considering purchasing a piece of land to build a home or business, be aware it won’t be as simple as a traditional mortgage. Land loans are nowhere near as common as mortgage loans, which mean there are much fewer options.
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About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.