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Conventional Rehab Loan

Posted on August 15, 2014 by Ray Williams.

Recently I received a call about renovation loans that brought about an interesting conversation. The most common calls we get are about FHA 203k loans, for renovation clients.  When I receive these inquiries I always ask what were their reasons for looking into a rehab loan, and what kind of work are they wanting to do to the property.  Sometimes an FHA 203k is not the only option. Did you know there is also a conventional rehab loan? And that  actually may be a better mortgage solution. The reason I bring this up is the other day I got a call about an FHA 203k loan. The client stated that the previous lender they spoke with said this was the only choice for a rehab loan.  Maybe for this lender this is the only rehab loan option they can offer but it is not the only option out there.  If your credit score is a 680, and if you have a minimum of 5% to put down, a conventional renovation loan might be better suited  for you.

I often call these loan programs cousins, since for both the FHA 203k and the conventional rehab loan your rehab/remodeling costs get added into your mortgage.  It is not a second mortgage, it is one loan, one low interest rate, with permanent financing (with a twist). One added benefit for a conventional renovation loan is that the max mortgage limit is $417k in the metro Denver area compared to $391K for FHA loans. This allows you more leverage on rehab/remodel costs and extends your purchase power.

We recently helped a client in which the purchase price was $300k where they put in over $100k+  into rehab/remodel work. The conventional renovation option helped them get the home they were wanting, and gave them the ability to add more work into the home.  If they would have done an FHA 203k they would not have been able to put as much rehab/remodel work into the home, since they would have been capped at $391K for loan amount.

My advice is don’t let a lender tell you that doing an FHA 203k is the only option for a rehab loan.  The only way an FHA 203k is the only option for you is if you don’t have a minimum of 5% down and if you’re below a 680 credit score. Know your options!! Both are great loan programs,  but do your research and learn which option is best suited for your needs. Make sure to speak to a qualified and experienced rehab lender. Ask the lenders you interview about their experiences, pointers, and get a feeling if you feel they have the experience you need just as you will when selecting your contractors. Happy renovating!

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