Rehab loans for real estate investors are very unique products.
They are customized to meet the needs of a fix and flip investor, and include a number of features that are specific to this type of loan.
Traditional hard money loans typically will not meet the needs of the short term real estate investor, and so a different product is needed.
The main differences between rehab loans and 'traditional' hard money loans include the length of term, the prepayment penalty, a fund controlled rehab account and a prepaid interest reserve account.
These features all must be there to assure not only the real estate investors success, but also to ensure the private investor lending funds the security needed when investing in first trust deeds.
Looking at these differences, the first one is the length of term.
Most fix and flip loans are somewhere between six and twelve months in duration.
These are not meant to be long term solutions, but rather short term bridge financing to allow the investor to acquire, rehab and sell the property.
Many have an extension feature, where the loan can be extended for a fee at the end of the term.
Generally speaking, if the extension is needed, the project has not gone according to plan.
Secondly, the prepayment penalty differs from your average hard money transaction.
Most of these types of loans have a prepayment penalty of some sort.
This is to guarantee the private money investor who is lending the money a return.
If money is lent, then paid back after a month, the typical investor is not going to be happy with a single months return on the loan.
With these short term loans, however, the goal is to be out as soon as possible.
For this reason, they are structured with no prepayment penalty.
The trade off for this, however, is that the cost of these loans with no prepayment penalty is higher upfront.
The fund control account, or builders control account, is a very important aspect of these types of loans.
This is a trust account or escrow account where money is held for the work to be done to the property.
Since the money is being lent using an after repair value, it is important to control these funds and ensure that the property is being improved.
The disbursement of these funds can very widely, so be sure to discuss with your representative how you can access your funds for the rehab costs.
The last difference we are going to look at is the prepaid interest reserve.
Usually these rehab loans are set up so that no payments are due for a period of time.
This money is financed into the loan and held, making monthly payments for the borrower.
This feature, in conjunction with the builders control account, ensures that the borrower has all the funds needed to get in, rehab the property, list the property and sell it before more out of pocket costs are required.
Each transaction is unique, and for that reason it is important to have a professional to work with who understands this type of lending, and has the resources to put it together.
They are customized to meet the needs of a fix and flip investor, and include a number of features that are specific to this type of loan.
Traditional hard money loans typically will not meet the needs of the short term real estate investor, and so a different product is needed.
The main differences between rehab loans and 'traditional' hard money loans include the length of term, the prepayment penalty, a fund controlled rehab account and a prepaid interest reserve account.
These features all must be there to assure not only the real estate investors success, but also to ensure the private investor lending funds the security needed when investing in first trust deeds.
Looking at these differences, the first one is the length of term.
Most fix and flip loans are somewhere between six and twelve months in duration.
These are not meant to be long term solutions, but rather short term bridge financing to allow the investor to acquire, rehab and sell the property.
Many have an extension feature, where the loan can be extended for a fee at the end of the term.
Generally speaking, if the extension is needed, the project has not gone according to plan.
Secondly, the prepayment penalty differs from your average hard money transaction.
Most of these types of loans have a prepayment penalty of some sort.
This is to guarantee the private money investor who is lending the money a return.
If money is lent, then paid back after a month, the typical investor is not going to be happy with a single months return on the loan.
With these short term loans, however, the goal is to be out as soon as possible.
For this reason, they are structured with no prepayment penalty.
The trade off for this, however, is that the cost of these loans with no prepayment penalty is higher upfront.
The fund control account, or builders control account, is a very important aspect of these types of loans.
This is a trust account or escrow account where money is held for the work to be done to the property.
Since the money is being lent using an after repair value, it is important to control these funds and ensure that the property is being improved.
The disbursement of these funds can very widely, so be sure to discuss with your representative how you can access your funds for the rehab costs.
The last difference we are going to look at is the prepaid interest reserve.
Usually these rehab loans are set up so that no payments are due for a period of time.
This money is financed into the loan and held, making monthly payments for the borrower.
This feature, in conjunction with the builders control account, ensures that the borrower has all the funds needed to get in, rehab the property, list the property and sell it before more out of pocket costs are required.
Each transaction is unique, and for that reason it is important to have a professional to work with who understands this type of lending, and has the resources to put it together.
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