One of the tricks with this rehab loan is finding realible sources for financing. I have found that banks will do the program for a while and then things will change and they will no longer be able to help you. Many times early on in my career I found myself in a pinch when a local bank pulled the plug on a deal no different than one I closed with them last month. My experience has been that they will run out of funds to lend or new people come to the bank who no longer think the rehab loan is a good program. Because of this, I am always working with new banks to establish other options for this program. I never want to be without at least two outlets for any deal.  

If you have interest in learning more about my rehab program, check out the REHAB Loan Page of my site or call me at 952-808-2820.

Rob Bonahoom

Mortage Coach

The magic starts by utilizing the maximum potential of two investment loan programs.

The first loan is used for the aquisition and renovation of your investment property. Yes I did say renovation. To use this system and loan program, there has to be some renovation required on the property. The minimum amount of rehab required is $10,000. It’s actually easier than you think to spend $10,000 on a home. Buy new appliances, paint and carpet and you can probably get there. Most of the good buys today that investors are looking for require some type of renovation work. The second requirement of this loan is that the property needs to appraise for 25% more than the aquistion cost and renovation costs added together. For example, if you buy a property for $50,000 and spend $25,000 on rehab costs, the home needs to appraise for at least $100,000. Warning! The bank does require that you escrow 20% of your loan amount in a secured savings account with them as collateral during your renovation. This money serves as a security deposit for both you and the bank if something goes wrong during construction. As long as everything goes correctly and you refinance into our second investment loan we are going to do, the escrow money comes back to you. This is an important key to our program. You have a six month time line in order to complete your work.

For the second loan we utilize Fannie Mae. Fannie has no seasoning on a refinance which means they will use the appraised value when they consider our loan to value ratio. This is an important key. If we were to use Fannie Mae directly on the purchase of this property, we would be required to put at least 20% down. By doing it on the refinance, we get the benefit of a long term – low rate financing package but also get the benefit of using the appraised value and no down payment is required. No cash out is allowed with this loan program.

Closing costs on the purchase can be paid by the seller and since we aren’t using Fannie Mae for that, and there is no limit on the amount the seller can pay. (Fannie Mae limits you to 2% of the sales price)

Once your refinance is completed, you are now into this property for very little cash invested. I see nothing fundamentally wrong with that as long as you are cash flowing on the property. In this real estate market, you can cash flow on property in any area of the Twin Cities utilizing this program.

The reason I reference 3 properties in the beginning of this article is because that is all Fannie Mae will allow you to finance with them. After your first 3 purchases, things will get a little harder and a little more expensive, but you can still follow a simillar system and limit your cash invested.

Rob Bonahoom Mortgage Coach

Here are some standards I have found in today’s market when looking for a rehab loan that will probably be required to have your loan approved by the bank.

1) 20% of your loan amount needs to be out into escrow in case a problem arises during the rehab process. This deposit is returned to you when the property has been fully renovated and the construction loan is paid off with permanent financing.

2) A debt to income ratio of less the 50% is required. Take your current gross income on your pay stubs and divide that by your monthly long term debt obligations like your mortgage payment, the minimum payment on your credit cards, car loan payments and other debts you may have with 10 or more payments left. Insurance and utility bills are not considered. You also need to take into account the property you are going to buy. Lenders will use 75% of the projected rental income of the property (even if the property is not currently rented) and subtract your payment for principle, interest, taxes and insurance.  A positive number adds to your income and a negative numbers adds to yoour debts. Self employed individuals will need to take a less agressive stance on the write offs in their business or they will find themselves unable to qualify for a mortgage. Lenders with take the net profit or loss from the business and divide that numbers from your current debts.

3) Your credit score needs to be  least a 680. Credit scores range from 450 to 850. A 680 score probably means your credit cards are paid down to at least 40% of the maximum balance available and you have had no late payments in the last 12 months.

If you can get through those toughbarriers to entry, the program can really be an effective way to acquire some great properties with low money down.

I wish I was starting out today buying properties. The deals are great and the cash flow is even greater.

Rob Bonahoom – Mortgage Coach – “Helping People Build Wealth Through Real Estate”