Many excellent properties are scooped up by cash buyers at below market value. In fact cash sales make up over 25% of all sales. Investors know they can buy a home that would be difficult to finance (due to property condition) and fix it up and sell it for a profit. But with a rehab loan, first time buyers and others can purchase these properties and obtain funds to do the repairs after closing.
This week I have two borrowers who seek a rehab loan. One wants to install new kitchen cabinets, countertops and flooring after closing. The other wants to upgrade the heating system from the existing old oil furnace to a new gas furnace. Here is how it works: the buyer puts the house under contract for a certain price (lets say $200,000). Then they get the quote to do the work (lets say $20,000). The lender requires that the rehab account includes an additional 10% contingency ($20,000 X 10% = $2000). So, in this case the acquisition cost is $222,000. The down payment is based on the acquisition cost. At closing, the seller of the property will be paid off and the title will transfer to the buyer and there will be an escrow account for the rehab funds — let the project begin!
We have five options at MMC for doing rehab loans. We have FHA 203K and FHA 203Ks (s stands for streamline for simpler projects). We offer RD/NH Housing rehab and we do a conventional rehab program (Fannie Mae Homestyle). Part of our service is that we help the customer decide which of these options is most appropriate for him/her/them.