How Does a Rehab Loan Work?

Building Needing RepairsWith so many foreclosures and short sales out there in need of repairs, buyers of these properties often ask us, “How does a rehab loan work?” Most of our clients are real estate investors who are buying distressed properties and using rehab loans to get them looking good again. Many real estate investors have the same question, “How does a rehab loan work?”

Because each private money lender who offers a rehab loan program has a different program, we will highlight the most common hard money rehab loan in our discussion here. Because a property is always more valuable after it’s been fixed up, a hard money rehab loan is usually given based on the value of a property after the fix up. For example, if you buy a property for $150,000 but it will eventually be worth $215,000 once it’s all fixed up. The value of $215,000 is the ARV or the after repaired value. But how does a rehab loan work in this case?

Most bank loans are given based on a percentage of the purchase price and not on a percentage of the After Repaired Value. How does this differ from a rehab loan? Most rehab lenders will lend on a percentage of the After Repaired Value and will give you a loan for 60% to 65% of the After Repaired Value.

Hard money rehab loans are by far the easiest loans to get for real estate investors who are buying and selling investment properties. They can usually fund in less than 14 days, but the interest rates are typically a lot higher than bank interest rates. Expect to pay 11% to 12% interest only on a hard money rehab loan. The loan term is usually 6 months to 1 year, and you have to expect to pay a loan fee as well. The loan fee is typically 3% to 5% of the loan amount for a rehab loan.

Let’s do a quick example of how a rehab loan works:

A foreclosed property needs work and is under contract to buy for $138,000. The property needs new appliances, flooring, paint, etc. It will cost approximately $15,000 to repair the property and get it ready to resell. Once the needed repairs and upgrades to the property are completed, the property should sell for $190,000. The buyer could get a hard money rehab loan to purchase the property. If the lender gives the buyer 65% of the After Repaired Value of $190,000 he could get a loan for $123,500 towards the purchase price of $138,000. The buyer closes on the property using the rehab loan to purchase it. The monthly interest payment is $1,380 based on a 12%, interest only rate. The buyer puts in $15,000 to repair the property and sells it in 120 days. The rehab loan gets paid off when the property sells. It’s that simple!

If you have any questions about how our rehab loans work, no question is a dumb question. For more info, click here, or submit an inquiry at this link:

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About the author

Corey Curwick Dutton, MBA Park City, Utah - 2005 MBA Graduate with 10 years experience in Business Management including International Management. Corey is a Private Money Lender and Loan Officer. In her spare time Corey enjoys writing on topics in the private money lending industry. She also enjoys hobbies such as mountain biking and skiing in the great outdoors of Utah.