If you are interested in purchasing an old house that needs extensive renovation, don't let the concern about the renovation costs be the thing that prevents you from buying the house. While it's true most lenders will not approve mortgages on houses that are in extreme disrepair, there are rehab loans available that can be approved. However, there are a few important things to consider before getting a rehab loan to buy an old house that needs extensive work done to it in order to make it inhabitable. Here's what you need to find out first. 

What is a rehab loan? 

A rehab loan essentially combines a mortgage with a home improvement loan and is based on the after-renovation value that the house and property will be instead of the current value it is when you buy it. By using what the value of the house will be after all the renovations are completed, lenders allow you to borrow more money than if you were to take on a mortgage just to buy the real estate property, with the caveat that you will use the additional money to pay for the renovation costs.

Does your local building code authority have any restrictions?

The first thing you should do before getting your heart and mind set on buying this property to renovate is to find out if there are any restrictions placed on the property by the local building code authority. For example, if the house is in a historic district, you may not be permitted to make significant changes to the house, such as removing historic architectural details. It's important to learn what you can and cannot do to the house before buying it or you could risk heavy fines through the county office.

What are the restrictions of the lender? 

Also, the lender will have restrictions that you will need to be aware of so you can plan accordingly. Most rehab loans have provisions that the loan is not to be used to pay for luxury amenities like an inground swimming pool. Rehab loans are generally used to renovate houses that are in disrepair not to remodel a house that is already in livable condition. Also, the lender may require you to use only licensed professional contractors to do the work that is necessary to complete the renovations. It's important that you understand these types of requirements and stipulations before taking on a rehab loan. A company like Constructive Loans LLC has more information on this topic.