Rehab Loans: What They Are & How They Work

A rehab loan is a loan that homeowners and investors use to finance the acquisition and renovation of a home, often as a residence. Rehab loans are ideal because they combine acquisition and rehab financing into a single loan, making it a fast and easy way for investors to finance a project.

What are Rehab Loans?

Rehab loans are residential real estate loans designed to help people buy and fix up a home. The loan allows homebuyers to pay for the purchase of and repairs to the house, helping them meet their needs without spending too much money.

Rehab loans are a great way for property investors to finance renovations and upgrades on existing homes. Conventional rehab loans provide funds for both purchase and repairs with one loan. Generally, borrowers must have a minimum credit score of 500 to qualify for rehab financing but may qualify for a reduced down payment with a score of 620 or higher. Additionally, certain lenders may impose additional regulations such as maximum debt-to-income ratio requirements or special down payment conditions. 

As a requirement of most rehab loans, including FHA 203(k) loans, buyers must prove that they will reside in the home being purchased and repaired, making these great solutions for homebuyers to turn a dated property into their dream home.

FHA 203(k) rehab loans

FHA 203(k) is the best-known federally-sponsored residential rehab loan. These loans are a type of rehab loan that provides financing for both the purchase and rehabilitation of a home. The loans are offered by the Federal Housing Administration (FHA) and are available to all qualified borrowers who meet eligibility requirements.

These loans can be used to purchase and rehabilitate single-family homes, houses with up to four units, as well as condos, townhomes, and mixed-use properties. Borrowers must occupy the property as their primary residence to qualify.

FHA 203(k) Rehab Loans can be an excellent option for borrowers who need funds to purchase and/or renovate a home while taking advantage of low down payment options offered by the FHA. These loans can help borrowers save money by avoiding the need for costly repairs after closing.

How Rehab Loans Work

Real estate investors and homeowners who want to turn a distressed property into their dream home or a successful business can use rehab loans to make it happen. These loans cover the cost of materials and labor needed to make the building safe and habitable. 

Rehab loans can also help consumers save money by refinancing an existing loan or combining different renovation costs in one package. Borrowers must usually provide a summary of planned repairs and renovations to be approved. 

Rehab loan process

The process for getting a rehab loan is similar to that of any other home loan. To qualify, borrowers start by completing a standard loan application and providing information and documentation about their finances, plus information about the property and project they want to finance. The lender then reviews the application, evaluates the property, and determines whether the borrower qualifies.

Once approved, the borrower obtains an initial loan amount based on the loan program’s requirements. For FHA 203(k), this is the lower of the projected value after rehabilitation or 110% of the current market value. This allows them to purchase or refinance the home and make repairs or improvements as part of their mortgage payment through a single transaction.

Most federally guaranteed rehab loans also have requirements for when work must be completed. The FHA 203(k) program requires all repairs to be started within 30 days and completed within six months from closing on the loan, and they must meet specific HUD standards. The borrower is responsible for any additional costs above the initial loan amount, as well as any insurance and other closing costs associated with the purchase or refinance of the home.

Types of Rehab Loans

There are several types of rehab loans. Some, such as FHA 203(k) and HomeStyle Renovation Mortgage, are federally guaranteed. For those that don’t qualify for a federally-sponsored loan program, need funding faster, or want to finance the renovation of a non-primary residence, there are also individual programs available from other lenders and hard money options. These programs vary by lender, location, property type, and other factors.

Here are some of the federally-guaranteed rehab loan options:

HomeStyle Renovation Mortgage

The HomeStyle Renovation Mortgage program is a federally-insured rehab loan program through Fannie Mae. These loans allow borrowers to purchase or refinance their residences while also receiving the funds they need to renovate and repair. These loans also offer borrowers the flexibility to finance up to 50% of their improvements with a first mortgage (or 80% with combination mortgages). 

CHOICERenovation Loan

The CHOICERenovation program is Freddie Mac’s renovation loan program. These loans combine the convenience of a traditional mortgage with the flexibility of financing consequential renovations and home improvements. With this loan, borrowers can customize a home as needed while enjoying low fixed-rate options, no origination fees, or cash due at closing. Additionally, it allows homeowners to purchase and renovate a property in one transaction—making it an ideal choice for those looking to save time and money.

Standard 203(k) loan

The Standard 203(k) loan is designed for larger, more extensive rehabilitation projects that involve structural repairs. This loan requires detailed repair cost estimates and a HUD-approved consultant to oversee the work. In addition, it allows borrowers to finance up to 110% of their home’s current market value or projected value after rehabilitation, whichever is less. This makes it an attractive option for borrowers looking to purchase or rehabilitate a home that needs significant repairs.

Streamline 203(k) loan

The Streamline 203(k) loan is a more limited version of Standard 203(k) that does not require detailed repair cost estimates. The borrower must still complete all needed repairs within six months from closing, but they can finance up to $35,000 in repairs with this loan option. 

Streamline 203(k) loans also do not require a HUD consultant or additional paperwork that may be necessary for a Standard 203(k). This can be an attractive option for borrowers looking to make minor improvements without having to obtain detailed repair costs and dealing with additional documentation.

What Can Rehab Loans Be Used For?

Rehab loans are an attractive option for homeowners looking to bring new life to a tired property. They allow funds to be sourced for materials and labor necessary for renovation or restoration work. Rehab loans can be used for anything from repairs on outdated plumbing or electrical wiring to home extensions, landscaping, and upgrades in kitchen and bathroom design. 

Rehab loans can be used to update, renovate, or improve many different types of properties, including:

  • Detached single-family residences
  • Condos
  • Townhomes
  • Duplexes
  • Triplexes
  • Fourplexes

Rehab loan restrictions

It’s important to remember that federally-guaranteed rehab loans are designed for individuals who wish to purchase or refinance a home and make repairs or improvements as part of their mortgage payment through one transaction. While these loans offer considerable flexibility and financing options, allowing borrowers to obtain up to 110% of their home’s current market value or projected value after rehabilitation, they are only eligible for use on a borrower’s primary residence. 

For borrowers who qualify, however, there are many benefits. For example, Streamline 203(k) borrowers may be able to finance up to $35,000 in repairs without having to obtain detailed repair costs or deal with additional paperwork. With the help of a rehab loan, borrowers can purchase and/or refinance a home and make necessary repairs without having to pay for upfront closing costs or other out-of-pocket expenses.

Rehab Loan Qualifications

Obtaining a rehab loan can help homeowners finance home improvement projects of any size. The basic requirements for a rehab loan are related to your credit score and income. However, some lenders may also have additional criteria that borrowers must meet. 

Generally, applicants must have a credit score above 500, steady employment or another reliable source of income, enough savings for a down payment and to pay closing costs, and a debt-to-income ratio below 43%. Borrowers will also need to provide documentation for these items, such as pay stubs, W2s, recent tax returns, and bank statements. Borrowers must also provide information on the property they intend to purchase, their planned closing date, and other details about their transaction.

In addition to the typical requirements associated with a conventional home loan, many rehab loans also require that a HUD consultant inspects and evaluates the property before closing to ensure that all contractual requirements are met. This includes verifying that all repairs have been completed according to plan and confirming that they meet HUD standards.

Rehab Loan Pros and Cons


  • Allows borrowers to purchase and/or refinance a home and make repairs or improvements as part of their mortgage payment through one transaction
  • Financing up to 110% of the home’s current market value, or projected value after rehabilitation (whichever is less)
  • May be able to finance up to $35,000 in repairs with little paperwork
  • Some loans don’t require detailed cost estimates or additional paperwork
  • Borrowers can qualify with a credit score as low as 500
  • Investors can obtain up to four units at once when using a federal rehab loan
  • Down payments options as low as 3.5% may be available
  • Flexible qualification criteria that allow those who may not meet traditional lending requirements to qualify


  • Credit scores of 620 or higher required for low down payment options
  • Some loans require a HUD-approved contractor or consultant to oversee the work
  • Repairs must be completed within six months from closing on the loan for most loan programs
  • Additional paperwork and documentation can add time to the application process 
  • Borrower debt-to-income ratios must be below 43%
  • Interest rates may be higher than traditional mortgages
  • Maximum loan-to-value ratio is limited to 110%

Conventional Home Rehab Loans vs. FHA 203(k) Loans

For the aspiring homebuyer presented with two different loan options, the differences between conventional rehab loans and FHA 203(k) loans can be confusing. Conventional rehab loans are typically used when more extensive renovation projects will be done on the property and require more funds than what you would use for a typical remodel. The funds are also released on a draw-schedule basis as specific rehabilitation milestones are met. 

On the other hand, FHA 203(k) loans offer an all-in-one solution that covers both the purchase price of a house plus necessary repairs in one lump payment. However, unlike conventional loans, there are limits on the amount of money you can borrow under this program. In any case, if you’re thinking about making improvements to your home beyond simple upgrades, it pays to do your homework and see which type best suits your situation.

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