Rehab Loans vs Hard Money Loans

Rehab loans are loans that finance rehabilitation and repair of existing homes. Hard money loans are loans that allow property owners to borrow money against the value of their homes. Like rehab loans, they can be used to bring existing homes to good condition. Both types of loans have their own advantages and disadvantages. Rehab loans were designed to combat blight and help communities maintain their vitality, while hard money loans were designed to hold off bankruptcy. In recent years, though, both types of loans have become tools for real estate investors who use them to rehabilitate foreclosed houses so that they can be sold for a higher price or rented out.   

Rehab Loans

Rehab loans are offered by local, state and federal governments, as well as private banks and organizations. For the most part, they can only be used to rehab single-family homes, though some make stipulations for condominium renovations. There are many different rehab loans tailored for different situations, and they all come with different conditions. Those conditions can include the borrower's income, the age and condition of the property and location of the property. Some rehab loans come with conditions on rent - for example, if the borrower is planning to rent the building out, he or she may be required to keep the rent below a certain threshold. That said, credit rating usually isn't a factor for qualifying and the interest rates are relatively low.

Hard Money Loans - A Viable Alternative?

Unlike other loans, which are made by commercial banks and other deposit institutions, hard money loans are offered by private lenders. As with rehab loans, the borrowers don't need a good credit score in order to qualify, and down payments are usually not required. The process doesn't involve many rules and the borrowers get a lot more leeway in how they can use their loans. However, there are reasons why the lenders can afford to be so lands-off. The borrower's property (which may or may not be the property that the borrower is looking to rehab) is used as collateral. The lenders charge interest rates that are considerably higher than those charged for the rehab loans. If the borrower fails to repay the loan, the lenders can foreclose on the property. So while hard money loans are easy to obtain, they can quickly backfire on the borrower if he or she does not live up to their financial obligations.

Finding a Loan for You

In the end, the choice between rehab loans and hard money loans hinges on the borrower's needs and the kinds of resources that they can bring to the project. The hard money loans provide a more hassle-free than rehab loans but the rehab loans benefit from having more lenient penalties should the borrower's financial situation take the turn for the worse. If the regulations for a particular rehab loan fit the borrower's project, the borrower may be better off going with a hard money loan. Either way, it is not a decision that should be entered in lightly, and having a second opinion certainly would not hurt.

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