AL and FL Mortgage News

Recently we highlighted some benefits of renovation loans (a.k.a. rehabilitation or rehab loans) to owner occupied borrowers but without mentioning how this specifically applies to real estate investors.  If you are a first-time real estate investor or a seasoned veteran with a large portfolio in multiple markets, you should be familiar with how a renovation loan differs from regular mortgages and as well as the recent guideline improvements which could make you more competitive on new acquisitions, drastically maximize your property values, increase rental cash flow and/or improve overall profitability on both a buy and hold situation or a quick flip.   

Updates for "Regular" Conventional Loans 
As of August 15, 2017 conventional investment purchase or rate and term refinance mortgage guidelines require a 15% down payment or equity position on one unit properties and this grows to 25% for 2-4 unit properties for credit scores 620 and above.  This is no doubt a big improvement over the 20%-30% restrictions put in place after 2009 but the assumption is that no repairs are needed or wanted because in either case financing repairs or improvements is not allowed.

When it comes to repairs and knowing if a renovation loan could help, ask yourself two questions:   Does the property in question need any kind of repairs or improvements in order be to eligible for traditional mortgage financing in its as is condition?  If the property is eligible, could the property produce significantly more rental income and/or command a higher sale price at sale time with some level of improvement(s)?  If your answer is yes or you are unsure to either question, keep reading.  

Existing Properties: For investors who want to repair/improve an investment property they currently own, you are limited on a traditional cash-out refinance to 75% of the current value on fixed rate loans, 65% on ARMs with a 5% reduction to both scenarios for  2-4 units. For some that equity position might be reasonable if you have owned the property for 10+ years, your original equity position was 50% or lower, and/or the value has increased significantly in recent years.  For many investors however this is not so and leads to issues like avoiding repairs, quick but repeated repairs, code violation, borrowing money at double digit interest rates to do repairs correctly and/or depleting much needed cash reserves.  It is important to note that cash-out mortgages for the purpose of home improvement do not in any way factor-in planned repairs because the value is based on how the home sits currently.

New Properties:  Aside from repairing/improving properties you already own, a large issue when acquiring the next property is the house not being eligible for financing in its “as is condition”.  If you use a traditional mortgage you are not allowed to finance repairs so you typically lose bargaining power if the seller is required and possibly unwilling to fix the issue(s) prior to.  Otherwise you have to find and utilize additional capital to do the improvements on top of the down payment and closing costs required at the time of purchase but even if you have those funds repairs have to be done prior to closing and you should never repair something on a property you do not own.  For new and small portfolio investors, this is a huge (if not the single largest) barrier to entry in not being able to “afford” that “best deal” on a property solely because it needed work or it needed “too much” work.  The end result is most investors who are not as fluid simply can't compete with those who are.       

The good news for all investors is that the power of a renovation loans can help level the playing field and is available to you today.  Unlike any time in recent years investors can use a rehab loan to finance 85% of the improved future value of a new property they wish to buy which means you get to finance 85% of the purchase price plus all renovation costs.  For existing properties investors are eligible for 75% of the future value so it is imperative to note that the renovation loan is 10% more powerful at the time of purchase, not after.  In either case with renovation loans you can tap into future equity that only a construction loan or hard money loans can access but you get better interest rates that are locked before closing and you don't have to refinance out of a renovation loan which translates to much lower overall closing costs and zero rate uncertainty.  

If you are interested in learning more about how future value works or how a renovation product might be helpful for an investment property you have in mind you can call us at 888-269-8335, email us at or apply online 24 hours a day.

We are licensed in Florida and Alabama

NMLS # 835698


Posted by Devin Murray on August 15th, 2017 7:00 PM



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