Buying a fixer-upper is a great way to get a home that would normally cost more than you can afford at a low price. However, you must be careful when applying for a loan for this kind of home because one mistake could tank your chances of being approved. Here are two things you need to remember when getting a rehab loan

Choose the Right Repair/Renovation Projects

Rehab loans provide you with money to make repairs and upgrades to the home. However, the bank wants to ensure the work done on the house will increase its market value enough to cover the mortgage in case it has to foreclose on and sell it to recoup any losses.

Because of this, lenders will typically limit the type of things you can do to the home using the loan proceeds. However, this depends a lot on the type of rehab loan you take out. For instance, with a 203k rehab loan, you cannot use the money on landscaping, luxury items such as pools, or renovations that will take over 6 months to complete.

So, it's important to ensure the stuff you want to do to the home complies with the lender's rules. The lender will usually have you submit a proposal outlining the projects you want to do and flag any that may go against their policies. You'll be given the opportunity to make the necessary changes to ensure your loan gets approved.

Be aware that the bank will verify what work has been done on the home to make sure the money is being spent as agreed. It's critical, then, that you stick to the project repair plan, or else the bank may levy financial penalties against you or cancel the loan altogether if you try to make unapproved changes.

Pick the Right Contractor

In any type of home construction project, the contractor will be one of the most important people on the team because this is the person who organizes all the elements required to get the work done, such as hiring employees and ordering materials.

When you have a rehab loan, however, it's even more critical to choose the right contractor. As noted previously, banks keep track of the type of work being done on the home. It's not unusual for lenders to require contractors to send in reports about the projects' status. You need someone who has experience with this and who'll get the paperwork done.

Additionally, you must stay on budget with a rehab loan, and any bids submitted have to be accurate. Any changes in the bid amounts can cause delays with approving your application and/or subsequent disbursement of loan funds.

For more information about rehab loans or help applying for one, contact a local lender.