What is a Rehab Loan?

A rehab loan is a loan that is used primarily in the rehabilitation of home or building. These types of loans may be made through traditional lenders, but are often insured by a governmental agency to make the risk more acceptable to the lender. The government sees the investment as a good way to rehabilitate and revitalize neighborhoods, as well as to expand the tax base in areas that have fallen into disrepair.

In the United States, one of the most common rehab loan programs is through the Housing and Urban Development 203(k) loan program. The 203(k) refers to the section of the National Housing Act of 1978 that deals with this type of loan for real estate, particularly housing. Individuals interested in qualifying under this chapter must meet a number of different requirements that include creditworthiness and making sure they have a qualifying property.

In most cases, a loan can be used not only to make improvements on the property, but also to purchase the property. This may allow the purchaser the ability to get a loan for more than the current value of the structure. The additional value to the home will be added once the repairs have been made, making the loan fully secured in the long run. Loans under the 203(k) program are only for structures designed for one to four families.

Another popular program is known as the community development block grant. This program is used extensively by many cities in order to bring older homes up to current building codes. It has strict upper income requirements and only applies to homes within areas that have been designated as having a significant amount of blight. The loans generally do not need to be repaid until the individual moves or the home is no longer the primary residence of that person.

Although these government programs are important and popular, many private lenders also work with homeowners to provide rehab loan options. These are generally referred to as home improvement loans, and are usually secured by the added value of the building. As a result, defaulting on a home improvement loan could mean the same as defaulting on a mortgage. Foreclosure is one of the options available to a bank trying to recover the lost loan.

Generally, a rehab loan can be used for nearly any type of home improvement project. Some optional projects, such as the building of pools or extravagant landscaping, may be ineligible for funding, especially from governmental sources. Therefore, those who are considering using a government-backed loan product should make sure they know what limitations exist before making application.