Construction Loan or Rehab Loan?
Choosing the Right Loan
The key to getting off to the right start on home ownership is to determine the right type of loan for you. In a hurry to move in? Any mortgage involving contractors and/or renovation will take longer than you would like. Knowing how long a type of loan will take helps.
If timing is not a factor, an FHA rehabilitation loan for fixer-uppers may be right for you. If you don’t mind waiting a bit longer, an FHA One-Time Close construction loan is also a great option for a more customized home.
The bottom line? You can’t be in a hurry to take the keys with these two types of home loans.
Needs and Goals
A construction loan is better if you have good FICO scores, a solid loan repayment history, and enough money to put 20% down on the loan in typical cases. If your home loan needs include saving more money upfront, there may be better choices than building a house from the ground up on your own lot.
A rehab loan to purchase and renovate a fixer-upper property is, comparatively speaking, a less risky loan for both the borrower and the lender. The down payment requirements are typical for FHA mortgages, and the FICO score issues are different for rehab loans.
Remember that lender standards will vary, and some participating FHA and VA lenders may have different qualifications for a rehab loan than a construction loan. Shopping around for a rehab loan or single-close loan lender is just as critical for these mortgages as for any other.
Cost Comparisons
If you plan to stay in your house for a long time, either option (construction loan or rehab loan) may work for you. If you plan to sell within a few years, a fixer-upper may or may not be the best choice, depending on how extensive the rehab work is.
For example, when you build a house from the ground up, you pay for a brand-new roof and all the other labor.
If you buy a fixer-upper with a roof that still has a decent amount of life, that’s an expense you might not have to contend with, at least in connection with the mortgage. Does the fixer-upper make more economic sense than building from the ground up?
Sometimes it does, and sometimes it doesn’t. Doing a cost comparison is something you and a lender should work on together. You want to see on paper where your money is going and how it will be used to complete your dream home.
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