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IWP!, flagship product is Chicago's premiere real estate Investment
magazine. Entitled Invest With Passion!, it is the tool for investors and professionals in the
Mid-West. The publication seeks to grow it's market share by providing
powerful information designed to build the reader both as an investor and a
person.
Since it's release in January of 2006, the magazine has been well received and
continues to gain momentum and support. The education, information, and
networking opportunities for the real estate investor has been long neglected.
No More!
The time is now and the momentum is building.
It's Happening!
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UNDERSTANDING REHAB LOANS
By Anita Clinton
In the midst of what is being
called "the mortgage breakdown," opportunities for investors and
homebuyers can be found in just about any area or neighborhood. The
varied unfortunate mishaps of some have turned out to produce fortunes for
others. Some of the properties are in "move in" condition, while others
require a little, and some instances, a lot, of TLC. Conventional lenders
will not finance properties that are in disrepair. This is where the
rehab loans come into play. These loans are used to cover the purchase
and rehabilitation (rehab) costs of the property. In most instances,
these loans are "temporary" loans, usually with 6-12 month terms. They
will also have higher interest rates than conventional loan because of the
increased risk factors.
THE REHAB LOAN
Like convention loan products,
there are different requirements/guidelines for each lender that offers
rehab loans. However, the one constant factor amongst them is the amount
financed is based upon the after repair value (ARV) of the property. The
ARV is determined by an appraiser who will factor in the amount and type
of repairs to be completed and comparable properties within a one mile
radius that have sold within a 0-12 month period. In this market, this
can prove to be challenging and the lender is aware of this. Therefore
most rehab lenders will lend between 50-80% of the ARV. At the conclusion
of the rehab, the loan is then refinanced into a conventional mortgage
product. For instance, if the ARV is $100,000 and the lender is financing
75% of the ARV, then the maximum loan amount allowed is $75,000 ($100,000
x .75).
OTHER FACTORS
The various factors that are
considered when financing rehab loans are determined by each specific
lender. However, here are some general factors to consider:
·
Qualifying Requirements. Like any other loan,
the borrower must have a sufficient credit profile, income and reserves.
Most rehab programs require a minimum 620 middle credit score, adequate
income to support repayment of the loan, and at least 4-12 month
reserves. Reserves are accessible funds (savings accounts, open line of
credit, CDs, etc.) that have been seasoned (sitting there) for at least 2
months.
·
Down Payment. The down payment requirements for
each program can vary anywhere from 0-25% down. In most instances, if
there is a down payment requirement, it is based on a percentage of the
purchase price. However, there are programs that will calculate the
percentage based on the total loan amount.
·
Closing Costs. With some programs, closing
costs can be finance in the loan providing the total doesn't exceed the
maximum loan amount. In addition, some programs may allow a 2-6% seller's
concession (seller paid closing cost).
·
Interest Rate. Because lenders incur a greater
risk with rehab loans, the interest rate will be higher than normal. The
rate is usually calculated as interest only and could range anywhere from
8-20+%. Keep in mind, this is a temporary loan and the goal is to get in
and out as quickly as possible.
·
Work Order. The rehab lender will request a
copy of the borrower's contractor bid (s) and a breakdown of the repairs
to be completed. Most lenders will provide a "Work Order" form for the
borrower and/or contractor to complete. This document will also be used
to determine the phases for the project's completion.
·
Appraisal. The rehab lender will most likely
request two types of values: the as-is value and the value after rehab.
The as-is value will denote the value of the property in its current
state. The value after rehab will factor in the repairs and comparable
properties in the area. Therefore, the appraiser will ask for a copy of
the work order.
·
Mortgage Payment Reserves. Some programs will
allow the borrower to finance mortgage payments into the loan. Meaning,
the borrower does not have make payments during the rehab. If the project
is completed in a shorter timeframe than originally expected, the
remaining payment reserves will be credited toward the principal balance.
·
Draws. The monies for the rehab is held in
escrow, usually by the title company until the draws are requested. Draws
(or payments) are issued to cover the expenses of each phase. Some
lenders will issue the first draw at the closing table, allocating the
funds upfront to start the rehab project. While others issue the first
draw only after the first phase is completed and inspected by a lender
approved inspector. This inspection will be done at the end of each phase
to ensure that the project is progressing and being completed up to the
lender's standards as agreed.
·
expenses of each phase. Some lenders will issue
the first draw at the closing table, allocating the funds upfront to start
the rehab project. While others issue the first draw only after the first
phase is completed and inspected by a lender approved inspector. This
inspection will be done at the end of each phase to ensure that the
project is progressing and being completed up to the lender's standards as
agreed.
·
Holdbacks. Some lenders require up to a 10%
holdback on each draw as a cautionary method. The total holdbacks are
usually released after the final inspection is completed.
·
Contingency Reserves. Contingency reserves can
range from 5-20%, at the lender's discretion. This is money that is set
aside to cover unexpected costs, ie, inaccurate prices, missing items,
overdrawn accounts, or any unexpected expenses. Like the holdbacks, this
money is usually released after the final inspection is completed.
FHA 203(K) REHAB LOAN
HUD offers the FHA 203(k) program
which is the exception to the general rules stated above. The FHA 203(k)
program is for buyers who plan to live in the property that is being
rehabbed (owner-occupied). It can be used for 1-4 unit properties and
some mixed-used properties. Like the standard FHA product, it requires
3-5% down. However, the borrower can use Down Payment Assistance Programs
(DPAP) to cover down payment and closing costs. The interest rate will be
more favorable that the other rehab loans, but not as low as standard FHA
loans. In addition to the contractor bids, the property must be inspected
by an FHA approved plan reviewer. He/she will inspect the property before
the appraisal is ordered to ensure compliance with the program
requirements. Once the project is complete, the loan acts as a standard
FHA product. There is no need to refinance.
CONCLUSION
The rehab loan is an excellent
product for investors, especially in the current market we are in.
However, due to misuse and inadequate planning, which results in defaults,
the program requirements are becoming more and more stringent. Successful
investors adequately plan out there investment ventures. They precisely
run there numbers, plan for the unexpected and devise contingency plans
just in case things don't go as originally planned. Wealth can definitely
be created in this season. Be sure to be a responsible investor.
*********************************************************
Anita Clinton is a licensed Loan
Origination and the founder and creator of OwnSomethingToday.com, which
encourages people to invest in real estate, stocks, and/or business to
create wealth. For more information, she can reached at 708-491-7394.
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