From replacing cabinets and flooring to adding one more bedroom, home renovation costs can really add up. The latest Producer Price Index (PPI) report released by the Bureau of Labor Statistics noted a 35.6% increase in the prices of goods used in residential construction since the start of the pandemic.

While every project is different, it’s no secret that many investors view their renovation budget as the core component of their return on investment -- but at what cost? With rising material costs, many investors are faced with cash flow concerns. These issues are huge for investors that are managing multiple projects at once, as the more money they have tied up in renovations the less cash flow they have to keep their investment strategy in motion.

When it comes to your renovation, the less cash you put in, the more liquidity you have. Most hard money lenders offer some form of Rehab Financing on top of your base loan amount. This type of financing helps investors maintain liquidity as it reimburses them for the renovation costs which keeps their cash working for them. From what it is and how it works to what lenders require, we’re diving into everything you need to know about Rehab Financing.

What is Rehab Financing?

Investors often find that conventional mortgage financing just isn’t suitable for their needs. The traditionally long closing times and restrictive requirements can quickly start to disrupt their investment strategies. Many investors are now turning to short-term Bridge Loans, an alternative form of financing that comes from hard money lenders or private lenders. This option provides investors with the funds needed to complete the initial purchase of the property along with additional funds to cover renovation costs (aka Rehab Financing).

In fact, for investors with little to no experience, many hard money lenders might require the borrower to use Rehab Financing when acquiring a Bridge Loan.

How Does Rehab Financing Work?

When it comes to your loan, think of your total loan amount in two buckets:

  1. Your base loan amount: goes to the purchase or refinance of the property
  2. Your rehab loan amount: used to cover renovations to the property

It works as a reimbursement program. You will come out of pocket initially and as work is completed and verified, you will be reimbursed expenses through a series of “draws”. Interest is only paid on drawn funds. Think of it like a credit card. Once you swipe it then interest accrues but undrawn money does not accrue interest. For funds that go unused, there are no penalties, so it’s a great financing option to cover rehab costs to the amount you need it. And if you don’t, no harm no foul.

For any fix and flip or construction project, the lender bases their loan amount on After Repair Value (ARV). This is estimated potential value of the property after all stated improvements and renovations have been completed. Most lenders will only finance up to 75% of the ARV when it comes to the total loan amount.

Now, let’s put together an example of a scenario where Rehab Financing is being used. You’re buying a property and here are the numbers:

Purchase price = $500,000

After Repair Value (ARV) = $650,000

Renovation costs = $80,000

In this example, if we are financing 80% loan-to-value (LTV) of your purchase price and 100% of renovation costs, your total loan amount would break down like this:

Base Loan Amount = $400,000

Rehab Financing = $80,000

Total Loan Amount = $480,000

  • In this scenario, the total loan amount is within the typical ARV requirements at about 74% of the $650,000 ARV.
  • Your 20% down payment is $100,000 + any additional closing costs.
  • Rehab Financing cannot be used to cover your 20% down payment or any closing costs. It is dedicated to reimbursing your rehab costs. When it comes to submitting costs for reimbursement, you can elect how many draws you want.
  • You can either pay for everything upfront and get reimbursed at the end or break it down into, for example, 4 draws of $20,000 each.

What Do Lenders Require for Rehab Financing?

As with all financing, certain documentation is required. It is helpful to have these prepared and ready:

  • The Contractor Profile (if applicable)
  • Insurance verification - typically $1M General liability
  • Your Rehab Budget

As stated previously, lenders generally finance up to 75% of the ARV. This means your total loan amount (base loan + rehab financing) must stay within those borders, especially if you are looking to receive 100% Rehab Financing.

Hard money lenders will often finance up to 100% of the rehab budget. In this case, they will usually require a FICO score of at least 640 and that the total loan amount stays within 75% of the ARV.

Based on the example above, 75% of the $650,000 ARV = $487,500 which is $87,500 above the base loan amount of $400,000. In that example and with an approved FICO score, the borrower would likely be able to receive 100% rehab financing for the whole $80,000 rehab budget.

Maintaining Liquidity is the Foundation of CIVIC’s Rehab Financing

Whether you’re an experienced investor or first-time borrower, CIVIC is here to help you achieve your real estate goals. We’re committed to helping our customers keep their investment strategy on track by helping you maintain liquidity with our Rehab Financing solution.

Put CIVIC's Rehab Financing to work for your next project, get started here.



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