When a customer came to Becky Ivins and Layne Cardon interested in buying a home that needed a lot of fixing up, they did what they usually do: look for a custom-fit solution that would work for the customer and for Bank of American Fork. The solution was a rehabilitation loan.
Rehabilitation loans work this way: the bank uses a construction loan to aid in the purchase of a home in need of rehabilitation. The appraiser looks at the current value of the home and the expected value after rehabilitation. The loan includes money to fix the home up. The loan then rolls over to a mortgage based on the higher value. In the end, the homeowner generally has an immediate ROI with the extra equity that results.
This is not a get-rich-quick scheme, but generally has win-win-win outcomes. This is a good program for first-time home buyers and a good way for individuals to build a rental portfolio using solid financial practices; this process improves run-down homes in older neighborhoods and has a positive effect on property values; and the bank benefits from these loans.
“I had a client that had lived in his home for several years and he needed to update the home and add extra bedrooms,” said Ivins. “We were able to help him add an extra bedroom and bathroom. We started with the construction loan, paid off his existing mortgage with the loan and then he rehabbed the home. In the end, his payment was just a little bit higher and he was able to reduce his rate.”
The following are some FAQs about rehabilitation loans:
Q: What do I need to have in order to be considered for a loan like this?
A: It’s a good idea to have:
• A source for foreclosed or run-down homes. One example is www.hudhomestore.gov for FHA-foreclosed homes.
• A financial institution.
• Some cash—at least 20-30 percent of the project cost to invest, depending on the project cost.
• A good contractor.
• An inspector.
• Landlord experience.
• A realtor that understands the process.
• An idea of rents in the area. You can try looking at services like www.rentometer.com.
Q: What are the first steps in obtaining a rehab loan?
A: Contact Becky Ivins at Bank of American Fork—she’ll send you a list of questions to get the initial process rolling. You’ll need to be prequalified to purchase a property, and after that, Becky Ivins (NMLS #447529) or Layne Cardon (NMLS#447514) will sit down with you to go over the details of your specific situation. Once you’re prequalified, you find the property that fits the program. A realtor can help calculate the estimated rent, how much it would cost to rehab, an estimated return on investment and whether it’s better to rent the property or resell it.
Q: What are some of the risks, pitfalls or things to avoid?
A: First of all, we will help you look for some of the problems that a person obtaining this type of loan might face (sometimes this is why a loan is turned down). Ivins always tells those who are interested, “We’ll work through the numbers together and figure out if this might work for you.” That being said, there are some risks you should consider.
If you have not been a landlord or had rentals before, it can be a challenging and frustrating process. The key is learning about the program and getting all the details before you begin.
Don’t be surprised if along the way you have some things that you did not think you would need to fix and end up having to fix them. That is why it is best to have some cash available.
If you can’t sell the home, finish the project or rent it out for enough to service the debt, you could lose money or even go bankrupt.
Rehabilitation loans are a good option for first-time homebuyers, and a good way for individuals to build a rental portfolio using solid financial practices. Becky Ivins and Layne Cardon at Bank of American Fork have the experience with this type of loan that will help you feel confident and comfortable. If you want to learn more, call 800-815-BANK and ask for Becky Ivins or Layne Cardon.