A rehab loan (or renovation loan) lets you roll both the purchase price of a house and the cost of repairs or upgrades into a single mortgage. Instead of using cash or high-interest credit cards after closing, construction funds go into an escrow account and get paid out to contractors as work finishes.

Common Types of Rehab Loans

FHA 203(k) Loan: Government-backed with lenient credit standards (typically 580+) and down payments starting at 3.5%. Must be used for a primary residence. Comes in two options:

Limited 203(k): Covers minor, non-structural updates up to $35,000–$75,000 depending on lender limits.

Standard 203(k): Covers major structural work, additions, or foundation repairs, but requires a HUD-certified consultant to oversee the project.

Fannie Mae HomeStyle / Freddie Mac ChoiceRenovation: Conventional options that generally require a 620+ credit score and 3%–5% down. Unlike FHA loans, these can be used on primary homes, second homes, or investment properties, and they allow luxury upgrades like pools or outdoor kitchens.

VA Renovation Loan: Allows eligible veterans and active-duty military members to buy and renovate a home with $0 down. Limited to non-structural upgrades.

Hard Money / Private Rehab Loans: Short-term, high-interest loans used primarily by real estate investors ("house flippers") for quick acquisitions and major overhauls.

How the Process Works

Pre-Approval: A lender evaluates your financial background and gives you a combined budget limit (home price + renovation costs).

Contractor Bids: You hire a licensed general contractor to create an itemized statement of work and labor/materials costs. DIY work is rarely allowed.

Appraisal (After-Repair Value): An appraiser reviews the contractor's plans and estimates what the home will be worth after repairs are finished.

Closing & Escrow: The loan closes, the seller gets paid, and renovation funds are placed into an escrow account.

Draws & Final Inspection: Work begins. As phases are finished and inspected, the lender issues payments directly to the contractor until final completion.