Rehab Mortgage

The FHA 203(k) rehabilitation loan can be used to get funds for home improvements over the purchase price of the home. There are a few more steps involved in getting a rehab loan as opposed to a basic FHA loan. The first step is to get a pre-commitment, to find out how much you are qualified to borrow, and then locate a home in need of rehabilitation that falls within that price range.

After signing the contract, the property is inspected, in a process that involves the borrower, contractor, and loan consultant. Following the inspection, the loan consultant will create a report detailing the needed improvements, and then an appraiser will determine how much the home will be worth after the improvements have been made. After the closing, funds for repairs are held in an escrow account and released as each repair is made.

To qualify for a rehab loan, the home must be at least one year old. The loan may be used to rehabilitate a home on its existing site, or it may also be used to purchase a home and move it to another site and then rehab it. It can also be used to refinance an existing mortgage if rehabilitation is necessary. It may also be used to convert a non-residential building to a residential use, or to change the number of units in the building.

The maximum amount you can borrow for a rehabilitation loan is the lower of the following two formulas: 110 percent of the value the house will have after rehabilitation, plus closing costs; or the lower of the as-is value of the property, or the purchase price before rehabilitation, plus the rehabilitation costs and closing costs.

During the rehabilitation process, some of the funds is set aside in escrow to help with mortgage payments. This mortgage payment reserve is considered to be part of the cost of rehabilitation for the purpose of determining the maximum allowable mortgage amount.