The 9 Basic Steps To Home Rehab Loans

Home rehab loans give you the chance to fix up a home and earn a lot of instant equity in the process. However, the loan process is more involved and time consuming than a simple purchase or refinance loan. If you are considering a home rehab loan, understanding these nine basic steps will make the project much smoother.

Step One: Home Rehab Loan Pre-qualification

Before you invest too much time and money in planning your home improvement project, talk to a home renovation loan officer about qualifying for financing. Let's face it - almost none of us can build a house without borrowing money from the bank. So, take a few moments to speak with a lender who specializes in home rehab loans and learn the details about the program that you would qualify for.

Step Two: The Pre-approval

In the first step, you simply got pre-qualified, meaning nobody pulled your credit or examined any application documentation. At the pre-approval stage, you actually apply for the home rehab loan and give the lender the right to pull your credit report and review some income/ asset documentation, as well as review any extra details about the project you are considering renovating.

Step Three: Compiling and Submitting Your Documentation

The pre-approval mentioned in step two is going to be mainly based on the information that you fill out on the application. Now, you have to submit documentation to prove that you provided accurate information. No credit file can go through official underwriting until all of the paperwork and documentation has been submitted.

Here's a brief summary of the typical items required for a home rehab loan:

a) Income and asset documentation to prove you earn the income you claimed on the application and prove that you have enough money in the bank/ savings;

b) Blueprints and home plans will be required if you are making major, structural renovations to the home;

c) Home improvement budget will need to be accurately compiled so the lender knows how much money to lend to get the home rehab loan in place;

d) Home purchase agreement (or settlement statement if you already bought it) and clean title insurance for the property to show that there are no hidden liens placed against the house.

Obviously, there are other items that will be needed, but these four items above are the stalwarts of a home rehab loan credit file. Once these items have been successfully completed, you are almost ready to go to the underwriting phase - as soon as the appraisal is done.

Step Four: The Home Rehab Loan Appraisal

For home renovation loans, you will need an appraisal completed based on the future estimated value of the renovated home. The appraiser will examine your future home's rehab plans and determine an estimated value based on the recent sale of very similar homes in the immediate area. If you are attempting to renovate a home that is out of the ordinary for your local area, you will most surely have problems getting an adequate appraisal completed.

Step Five: Home Rehab Loan Underwriting

Just like any other mortgage, your file will have to go through underwriting. However, unlike simpler loans, a home rehab loan will require underwriting in two basic stages - underwriting your credit worthiness as a borrower and underwriting the project's worthiness based on the appraisal and budget. Definitely expect the underwriting phase to last longer for a home renovation loan than would be required for a simpler purchase or refinance loan.

Step Six: Clearing Conditions

Once the home rehab loan is officially approved in underwriting, there will almost surely be several minor conditions or issues that need to be cleared up before you can close on the loan. Typically, these are minor issues, such as updating a pay stub from work or providing the latest bank statement. However, sometimes there will be questions and concerns about the appraisal that will need to be addressed. Sometimes, the appraiser will have to make revisions or updates to the appraisal to satisfy any questions that the underwriter has.

Step Seven: Home Renovation Loan Closing

Once your file has cleared all conditions, your closing can be scheduled. You will go sit down with your closing agent or attorney and sign all of the final paperwork. If your home rehab loan is good, this will be your only closing required. You will not have to go through another closing once your home is completed, because the renovation loan will include the permanent financing wrapped into it.

Step Eight: Taking Home Rehab Loan Draws to Renovate Your Home

You will take draws from the lender as you renovate your home. During the renovation phase, the lender will also continue to update the title insurance to ensure that nobody has placed any liens on the property while you fix up your house. These title work updates are often called endorsements or date downs.

Step Nine: Convert to Your Permanent Mortgage and Move Into Your New Home

Once the home rehab phase is complete, you can move into your new home. This should not require a second closing. If you took the time to put together an accurate budget and hire quality sub-contractors, then your home improvement project should end successfully. You should move into your new home with a lot of equity that you earned by improving your property through a home rehab loan that wrapped the costs of repairs into one single, fixed rate mortgage.