FHA Rehab Loans vs. Home Improvement Loans
June 7, 2024
What’s the difference between FHA rehab and home improvement loans? Some people use the terms interchangeably, but an FHA 203(k) rehab loan is very different from a home equity line of credit or a home improvement loan.
Home Improvement vs. Rehab
A rehab loan implies a certain scope of work, which may include labor on load-bearing walls and other potentially large-scale work. The FHA 203(k) rehab loan has a standard version for that type of project and a more limited-scope version for less ambitious work.
A home improvement loan may be thought to be (by a lender) a smaller-scale opportunity featuring smaller approved projects where applicable and lower loan amounts. But not always. Shopping around for the right lender and loan for your needs is key.
Home improvement loans can come in the form of a cash-out refinance (the most unrestricted of the options in some cases) or a home equity loan. FHA 203(k) rehab loans and FHA cash-out refinance options are options if you want the FHA’s low 3.5% down payment for a rehab purchase loan.
There is no down payment on an FHA cash-out refi, naturally, but as with any loan, there are fees and closing costs to contend with.
FHA Home Improvement Loans
The FHA does not offer a home equity line of credit (HELOC) that some homeowners use to make smaller renovations, and it does not offer a home improvement loan option featuring cash back to the borrower.
The FHA cash-out refi is as close as you can get to an FHA version of a home improvement loan. At least in terms of a loan with no restrictions on your chosen renovation projects. Why?
FHA rehab loans can’t be used for business purposes, luxury items, or homes the borrower(s) don’t intend to live in. You can’t add swimming pools, barbecue pits, or install a hot tub using FHA 203(k) loan funds.
FHA Home Equity Lines of Credit
The FHA does not offer a traditional home equity line of credit, which some use to draw funds to pay for home improvement. Cash-out refinance loans, FHA reverse mortgages, and FHA rehab loans are your options for repairing and improving a home.
FHA Renovation Loan Options
If you choose an FHA 203(k) rehab loan or an FHA cash-out refinance, you can pay 10% down and drop mortgage insurance after 11 years.
You also have the option to pay off the loan early with no penalty, and you can choose to add on the FHA Energy Efficient Mortgage package to add approved energy-saving upgrades to the property regardless of what other work you may have done.
------------------------------
RELATED VIDEOS:
Get Your Questions Ready for Your Loan Officer
The Last Part of the Transaction Is the Mortgage Closing
Know What You Can Borrow With Prequalification
Home Improvement vs. Rehab
A rehab loan implies a certain scope of work, which may include labor on load-bearing walls and other potentially large-scale work. The FHA 203(k) rehab loan has a standard version for that type of project and a more limited-scope version for less ambitious work.
A home improvement loan may be thought to be (by a lender) a smaller-scale opportunity featuring smaller approved projects where applicable and lower loan amounts. But not always. Shopping around for the right lender and loan for your needs is key.
Home improvement loans can come in the form of a cash-out refinance (the most unrestricted of the options in some cases) or a home equity loan. FHA 203(k) rehab loans and FHA cash-out refinance options are options if you want the FHA’s low 3.5% down payment for a rehab purchase loan.
There is no down payment on an FHA cash-out refi, naturally, but as with any loan, there are fees and closing costs to contend with.
FHA Home Improvement Loans
The FHA does not offer a home equity line of credit (HELOC) that some homeowners use to make smaller renovations, and it does not offer a home improvement loan option featuring cash back to the borrower.
The FHA cash-out refi is as close as you can get to an FHA version of a home improvement loan. At least in terms of a loan with no restrictions on your chosen renovation projects. Why?
FHA rehab loans can’t be used for business purposes, luxury items, or homes the borrower(s) don’t intend to live in. You can’t add swimming pools, barbecue pits, or install a hot tub using FHA 203(k) loan funds.
FHA Home Equity Lines of Credit
The FHA does not offer a traditional home equity line of credit, which some use to draw funds to pay for home improvement. Cash-out refinance loans, FHA reverse mortgages, and FHA rehab loans are your options for repairing and improving a home.
FHA Renovation Loan Options
If you choose an FHA 203(k) rehab loan or an FHA cash-out refinance, you can pay 10% down and drop mortgage insurance after 11 years.
You also have the option to pay off the loan early with no penalty, and you can choose to add on the FHA Energy Efficient Mortgage package to add approved energy-saving upgrades to the property regardless of what other work you may have done.
------------------------------
RELATED VIDEOS:
Get Your Questions Ready for Your Loan Officer
The Last Part of the Transaction Is the Mortgage Closing
Know What You Can Borrow With Prequalification
Do you know what's on your credit report?
Learn what your score means.
