Rehab Financing Still Available In Today's Market

As the real estate market begins to turn around slowly, investors are once again searching for good rehab and flip opportunities. Even in today's market, there are financing options available for these types of deals but the underwriting guidelines are more stringent. The first thing a lender will ask is how much experience the borrower has in renovating homes. Even if they plan on using a general contractor for the work, managing the process and making sure everything gets done on time is a risky proposition. After determining the borrower's level of experience, the lender will then try to get an idea of how much work needs to be done to the property. Even a property that is in need of light repairs may be difficult to finance conventionally or through FHA without the repairs being made first. Another important question to have answered is what will be the properties intended use? Primary residence? Investment? If the borrower plans to use the property as their home they may want to consider an FHA 203k rehab mortgage that allows them to finance both the purchase price and repair cost. There is a similar program for homes that are currently owned by Fannie Mae called the HomePath Renovation mortgage, which can also be used for both the purchase and repair costs.

Another option for a borrower is to work with a private investor for financing. Private financing is a general term used to describe any individual investor or company that finances the acquisition and rehab cost for a property in exchange for equity in the project, interest on the funds, or both. Private financing may also be referred to as hard money lending. The company or investor providing the financing will have their own underwriting criteria, but most are very similar. One common misconception about hard money lending is that it is completely asset based and that the individual borrower's credit does not matter. This is not true in today's market. Because of depreciating home values, most hard money lenders today will have a minimum credit score requirement and income documentation.

With that said, the most important factor in determining what can be borrowed for most rehab projects is called the After Repair Value, or ARV. The ARV is the value that the home is likely to be worth once all of the expected repairs have been made. Most lenders will lend from 65% to 75% of the ARV, which can include the purchase price, closing costs, and repair cost. The interest rates and closing costs for rehab loans are almost always going to be higher than a conventional mortgage because of the increased risk and additional inspections that have to be made during the rehab process.

No matter what form of rehab financing you intend to use, it is most important to have an experienced contractor tour the property prior to closing. A conservative estimate on construction costs will be necessary as part of your loan application. In addition, it is essential that you and your Realtor thoroughly research sales comparables in the area. A range of final sales prices, in conjunction with a cost estimate, will help you determine if the deal is worth pursuing before you make an offer.

Joe Jesuele is the founder and president of NJ Mortgage, a financial services company based in Moorestown, NJ. Joe is also the founder of Northern Liberties Real Estate in Philadelphia, PA.