05/05/2026
What do realtors need to know about rehab loans?
Too many realtors don't understand, or even know about, renovation loans that are offered by many lenders. A renovation loan is a loan that allows your buyer to purchase that home that needs a little updating or even those that need major renovations, including complete tear downs in some cases. They can be used on single family houses or on up to four-unit buildings. You can even build new accessory dwelling units (ADUs). Today 94% of Americas existing housing stock is over 30 years old. Many otherwise livable homes sit unoccupied because of needed renovations.
What are the most common reno loans?
Probably the best known reno loan is the FHA 203k, however there are others such as the Fannie Mae Homestyle, the USDA reno, and the VA reno. Each of these loans is a little different from the other allowing you to select the loan that's right for your situation. They all provide funds to purchase the home ”AS IS” as well as the funds for the rehab, all in one closing with one loan. Our advice is to reach out to your regular lender and see if they offer these loans. If you don't have a regular lender, or your regular lender doesn't do reno loans, reach out to us and we can introduce you to reno lenders that we've worked with in the past. They should be able to teach you the different nuances for each loan program. For example, the down payment on an FHA 203k is 3.5% down. The Homestyle is 5% down, and both the USDA and VA reno loans can be nothing down.
How do you save a lost deal?
Sometimes the buyer wants to back out of the deal when an inspection report comes back with deficiencies. This is a prime time to introduce your buyer to a renovation loan. Now they can still purchase this home and get the additional funds to do the repairs, remodeling, or just a little updating. The opportunities with a reno loan are many. You can buy an existing home, knock it down, and come back with all new construction. You can also increase the footprint and make the home larger. You can add additions to the home to make the kitchen or master bedroom suite larger. Or you can use a reno loan for simple remodeling, as in updating the kitchens and baths.
How about showing less homes and selling more?
When we are teaching realtors today, we try to teach them how to sell a vision. Anyone can go in and say “oh look at this nice kitchen” even though it has not been remodeled in 30 years. Most buyers are going to come to you with specific needs such as they need three bedrooms, two baths, and they want this zip code or school district. So, what are you going to do? You are going to research the MLS and find properties that check all the boxes and take them out driving around.
Now after you have shown them a house ask them what they like and don't like about this house? Most will be honest and tell you that the kitchen and baths are outdated, or this home would be so much nicer if these two walls were removed, and it would be so much better if it had a great room or a fenced yard.
That is when you paint a picture or vision of what it can be. So, you will take them back to the kitchen and explain that they can pick out whatever 42-inch maple cabinets they like, you can add a nice island over here, you can choose a tile backsplash or ceramic tile floor along with adding can lights in the ceiling. You can also choose those new free-standing Stainless-Steel appliances that they like. They can now make that their kitchen. Now that you have painted that vision, they are more apt to want to buy that home. What is even better is that they will not have to make any mortgage payments during the construction, and they will not have to move in until all the remodeling is done. Wow, how exciting is that? That is how you show less and close more.
What about cash only listings?
A renovation loan is almost as good as a cash sale. The difference is that it might take a little longer to close as renovation loans typically take 35 to 45 days.
The listing agent or seller needs to know that you will not be asking the seller to do any repairs, and you can take the house as is.
There also will not be an appraisal contingency because the reno loans values are based on the after improved value and not the as is value.
So, we suggest that you research all those cash only listings and find that crappy house in a nice neighborhood. Let’s also research all those listings that say the key words like Investor Special, Cash Only, Needs TLC, Sold AS IS, or expired listings.
You do not need to be afraid of those listings any longer. You can also consider all those listings that say no FHA or conventional financing only. One of the tricks we teach is to not list FHA on the offers presented. All you really need to put on the offer is that they will be using renovation financing. The truth is you may not know which reno loan you're going to use at the time. We suggest that you do this because many realtors or sellers will not accept an offer that says FHA. Changing your way of doing business will open a whole new avenue of possibilities.
How about affordability?
With home prices rising, purchasing that fixer upper house can often be done at a much lower price because they need repairs. There’s also less competition which increases negotiation power. It's not uncommon to see tens of thousands of dollars of equity after rehab is completed. Not to forget mentioning lower mortgages which equal lower payments. So, let’s talk about affordability. Another reason renovation loans are better loan products is that they can purchase the home as is and design their own kitchens or baths. Buyers can make this their dream home.
FHA has changed their views on ADU units. We can now use 203k construction funds to build new Accessory Dwelling Units. That allows buyers to create new rentable living units. That creates affordability because now you have someone else helping you pay the mortgage every month. The future rental income can also be used to help the buyer qualify for the loan.
What we do.
As a 203k Construction Consultant, we work directly for the borrower. What we do is a brief inspection of the property to identify what mandatory items need to be included in their construction budget. Once we have identified those items, we take into consideration whatever the borrower’s desires are.
When the scope of work is dialed in, we generate a cost estimate based on what we believe the average contractor would change to perform that degree of work.
Once the borrower approves the final draft, we send all the reports to not only the borrower, but to the lender also. Included in our final package will be a duplicate of our bid, but it does not print the dollars. That is the document given to the contractors to bid on. The lender will give our report to the Appraiser, and they will appraise the home as after improved and not "as is". At the same time, the borrower will select the contractor with which they are most comfortable.
As the job progresses the contractor calls us for Draw Inspections. We will come out and inspect the work that is in place. We verify the quantity and quality of the work they have completed. We then send the documents to the lender and funds are released to the contractor. We are involved from beginning to end.
If your go to lender does not offer these loans, we can introduce you to incredibly good renovation loan lenders across the country. We also have a list of local renovation contractors that we see all the time. They understand these programs and are incredibly good renovation contractors.
Feel free to reach out if you have any questions or concerns as we are here to help.
Barry Niemuth
Yellow Hat Inspections of Texas LLC
Sprk Solar Certified 07172504
FHA 203k Consultant D1176
TREC # 23545
yellowhatoftexas.com
210-239-0367 San Antonio
512-853-9801 Austin
