Why Use A Rehab Loan Instead Of A Traditional Mortgage To Fix Your House

Posted on: 16 December 2022

Are you interested in buying a home that is going to need quite a bit of work to repair once it's yours? If so, know that a traditional mortgage is not going to be the best option in this situation. There is a different type of loan, known as a rehab loan, that is going to work much better due to the following reasons.

Lower Interest Rate For Repair Costs

If you do not have the cash on hand to pay for all the repairs, then you'll need to finance it one way or another. If you got a traditional mortgage, you would need to get a separate line of credit to pay for those costs. However, the interest rate on that line of credit is typically higher than if you just got a rehab loan. All of the rehab related costs are rolled into the rehab loan, which makes it a cheaper way to borrow all the money you need.

In addition, you'll only have one loan that covers all your expenses, so you only go through the closing process once. You'll end up paying less in closing fees as a result, which puts more money back in your pocket. 

Easier Approval For Distressed Properties 

When you use a traditional mortgage, the lender pretty much looks for the property to be in usable condition for you to qualify for a loan. If you were to buy a distressed property with a traditional mortgage, it is possible that the loan is declined simply due to the condition of the home. This is not the case with a rehab loan, which goes into the borrowing process knowing that the home needs some work. This means that you are more likely to get a rehab loan approved for a property that needs work done to it. 

More Flexible Than Competing Loans For Renovations

There are other types of loan that you can get to make renovations to a home, such as the kind offered from Fannie Mae and Freddie Mac. However, you'll find that these other types of loans have a lot of restrictions that make it hard to work with, which include qualifying with your property. A rehab loan also gives you more flexibility with the terms of the loan when it comes to making renovations. You may be surprised that you are allowed to make more upgrades to the home than you would with competing products.