Rehab Loans

Finance Your Purchase and Renovation in One Loan

Rehab loans are ideal for homebuyers and investors looking to purchase a property that needs repairs or improvements. These loans combine the cost of the home and the cost of renovations into one convenient mortgage, making them perfect for fixer-uppers, outdated properties, or homes in need of structural or cosmetic upgrades.

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What is a Rehab Loan?

A rehab loan is a specialized mortgage that provides funding for both the purchase of a property and the cost of renovating it. Rather than taking out a separate construction or personal loan to cover renovation expenses, borrowers can finance the improvements directly into their mortgage. After closing, the lender releases the renovation funds in stages as work is completed and inspected. This allows buyers to transform homes that would otherwise not qualify for traditional financing. Rehab loans are commonly used by homeowners who want to customize their space or by investors looking to increase a property’s value through strategic upgrades.

Key Features of Rehab Loans

Combines home purchase price and renovation costs into one loan
Ideal for fixer-uppers and distressed properties
Funds released in stages as renovation work is completed
Requires licensed contractors and approved renovation plans
Home must meet all safety and habitability standards after renovations
Available for primary residences and some investment properties
Can increase property value and equity after completion
Simplifies financing compared to using multiple loans
May offer competitive rates based on final appraised value

Types of Rehab Loans

FHA 203(k) Standard – For major renovations, structural changes, and large projects
FHA 203(k) Limited – For minor, non-structural repairs and improvements
Fannie Mae HomeStyle® Loan – Allows extensive renovations, including luxury upgrades
Freddie Mac CHOICERenovation® Loan – Similar to HomeStyle, with flexibility on improvements
Construction-to-Permanent Loan – Converts from construction financing into a long-term mortgage

Frequently Asked Questions – Rehab Loans

1. What is a rehab loan?

A rehab loan is a mortgage that finances both the purchase of a property and the cost of repairs or renovations. It’s ideal for buyers looking to purchase a fixer-upper or investors planning property improvements.

2. How does a rehab loan work?

The lender approves a loan amount that includes the purchase price plus estimated renovation costs. Funds for repairs are typically placed in an escrow account and released as work is completed.

3. What types of rehab loans are available?

FHA 203(k) Loan – For primary residences needing major repairs.
Fannie Mae HomeStyle® Loan – For cosmetic and structural improvements.
Investor rehab loans – For fix-and-flip projects or rental property upgrades.

4. What can rehab loan funds be used for?

Eligible uses include:

Structural repairs
Kitchen and bathroom remodels
Flooring, roofing, and HVAC upgrades
Energy efficiency improvements

5. What are the down payment requirements?

Down payments vary by program:

FHA 203(k): as low as 3.5%
Conventional rehab loans: typically 5–20%
Investor rehab loans: often 20–30%

6. What credit score do I need?

Most rehab loan programs require a minimum score of 620–640, though higher scores can help secure better rates.

7. Do I need a licensed contractor?

Yes. Most programs require renovations to be completed by licensed professionals. DIY work is generally not allowed for major repairs.

8. Are there limits on renovation costs?

Yes. FHA 203(k) and HomeStyle® loans have limits based on property value and program guidelines. Renovations must be permanently affixed and add value to the property.

9. How long does the process take?

Rehab loans often take longer to close than standard mortgages because they require contractor bids, renovation plans, and additional underwriting steps.

10. What are the pros and cons of rehab loans?

Pros: One loan for purchase and renovation, increases property value, lower interest than personal loans
Cons: More paperwork, longer closing times, strict guidelines on eligible improvements