What Is a Rehab Loan? Programs, Costs, and Requirements

A rehab loan is a single mortgage that finances both the purchase (or refinance) of a home and the cost of renovating it, so you close once and make one monthly payment instead of stacking a purchase loan on top of a separate construction loan. The federal government backs the most common version through the FHA 203(k) program, and conventional and VA alternatives cover the situations FHA won’t. Each program sets its own limits on how much work you can finance, what shape the property can be in at closing, and how the money reaches your contractor. Program choice matters more than most borrowers expect, because a mismatch between the loan and the project can stall the deal for months.

The Main Rehab Loan Programs

Four programs cover almost every rehab loan scenario. The right one depends on how you’ll use the property, how much work it needs, and what your credit and down payment look like.

FHA 203(k) Limited

The Limited 203(k) is built for non-structural work: new flooring, updated plumbing or HVAC, kitchen and bath remodels that don’t move walls, roof replacement, accessibility improvements. Renovation costs can run up to $75,000 with no minimum. You don’t need a HUD Consultant, which saves roughly $1,000 to $1,400 in fees and cuts down on paperwork. All work must be finished within nine months of closing.¹

Like all FHA loans, the down payment can go as low as 3.5% of the combined purchase and renovation cost.² The property must become your primary residence.³ The total mortgage can’t exceed FHA loan limits for your county, which in 2026 range from $541,287 in lower-cost areas to $1,249,125 in the most expensive markets.⁴

FHA 203(k) Standard

The Standard 203(k) handles the bigger jobs: foundation repair, room additions, moving load-bearing walls, or anything that pushes past the Limited program’s $75,000 cap. Minimum renovation cost is $5,000.⁵ A HUD-approved Consultant is mandatory. That person writes up the scope of work, reviews contractor bids, inspects completed work before each draw, and referees between you, your contractor, and the lender.¹ The timeline stretches to 12 months.

Fannie Mae HomeStyle Renovation

HomeStyle is the conventional answer to the 203(k), and it opens up situations FHA locks out. It finances almost any renovation permanently attached to the property, including luxury items like pools or landscaping. Eligible property types include primary residences, second homes, and one-unit investment properties. In 2026, the conforming loan limit is $832,750 in standard areas and $1,249,125 in high-cost areas, well above the FHA floor in most markets.⁴

For a purchase, renovation costs can reach up to 75% of the lesser of the purchase price plus renovation costs, or the after-completed appraised value.⁶ The trade-off is tighter qualifying. Fannie Mae’s automated underwriting can approve credit scores as low as 620, but many lenders set their own minimum closer to 680 for renovation products. Down payments start at 5% for a primary residence and jump to 15% for a one-unit investment property.⁷ HomeStyle allows a limited amount of DIY work, up to 10% of the after-completed property value, but you can only finance materials — not your own labor.

Freddie Mac CHOICERenovation

CHOICERenovation works much like HomeStyle: one closing, funds held in escrow, draws tied to milestones. It covers 1-to-4-unit primary residences, second homes, one-unit investment properties, manufactured homes, and even co-ops.⁸ Maximum LTV reaches 97% for eligible first-time buyers using the Home Possible program and 90% for second homes. Lenders can also draw up to 50% of material costs at closing, which helps contractors get moving on large projects.

VA Renovation Loans

Veterans and eligible service members can use a VA-backed renovation loan to buy and improve a home with no down payment in many cases. Renovation costs fold into the total loan amount the way they do in other programs.⁹ If the after-completed appraised value exceeds the combined purchase and renovation cost, you can finance the entire amount. If it doesn’t, you’ll cover the difference out of pocket. The maximum contingency reserve under the VA program is 15% of alteration and repair costs. Fewer lenders offer VA renovation loans than FHA or conventional versions, so expect to shop.

Who Qualifies, and What Properties Qualify

Every rehab loan program looks at two things at once: whether you can afford the payments and whether the property is worth renovating.

Borrower Requirements

FHA 203(k) is the most accessible. Minimum credit score varies by lender but commonly starts around 580 to 620. You’ll need a stable income history, typically two years of W-2s or tax returns. Debt-to-income ratios generally stay below 43% to 45%, though FHA allows some flexibility with strong compensating factors like cash reserves.

Conventional HomeStyle and CHOICERenovation loans usually demand higher credit scores. Many lenders set the floor at 680 for renovation-specific products even when the automated systems would go lower. Expect stricter DTI limits and larger reserve requirements, especially for investment properties.

VA renovation loans use the VA’s own eligibility standards, which center on military service history rather than a down payment. You’ll need a Certificate of Eligibility documenting qualifying active-duty or reserve service.¹⁰

Property Requirements

FHA 203(k) loans cover single-family homes, 2-to-4-unit dwellings, townhomes, eligible condominiums, manufactured homes titled as real estate, and mixed-use properties that are at least 51% residential. The property must be at least one year old and must be your primary residence.³ No vacation homes, no rental-only properties.

Conventional programs are more permissive on property use. HomeStyle and CHOICERenovation both allow second homes and one-unit investment properties.⁸ For HomeStyle investment properties, expect an 85% maximum LTV on a purchase, meaning 15% down.⁷

Costs Rehab Loans Add That Standard Mortgages Don’t

The renovation budget is only part of what you’re paying for. Rehab loans carry extra costs that catch borrowers off guard at closing and during construction.

FHA Mortgage Insurance

Every FHA 203(k) loan carries an upfront mortgage insurance premium of 1.75% of the base loan amount, typically financed into the loan, plus an annual MIP paid monthly. For a 30-year loan with the standard 3.5% down, annual MIP runs 0.55% on balances up to $726,200 and 0.75% above that. Unlike conventional PMI, FHA mortgage insurance generally stays for the life of the loan when you put less than 10% down. On a mid-range loan, that adds $150 to $300 per month.

Contingency Reserves

Lenders build a contingency reserve into the loan to cover the surprises that appear once walls come down. For Standard 203(k) loans on homes less than 30 years old, the minimum is 10% and the maximum is 20% of the renovation cost. For homes 30 years or older, a 10% minimum is always required, and that jumps to 15% if utilities aren’t operational at the time of the write-up.¹¹ Anything unspent gets applied to your loan principal when the project wraps, so the money isn’t wasted, but it does raise your initial balance and monthly payment.

HUD Consultant Fees

On a Standard 203(k), the Consultant’s fee for the work write-up typically runs $1,000 to $2,000 depending on project size. Draw inspections carry separate flat fees, commonly around $375 each. These can be financed into the loan, but they still add to what you owe.

Insurance During Construction

Most homeowners policies restrict or deny coverage when a property sits vacant for 30 to 60 consecutive days. If the home is uninhabitable during renovation, which is common on Standard 203(k) projects, your standard policy may not cover fire, theft, or water damage during construction. You’ll likely need a builder’s risk policy or a vacant-property endorsement. The lender will require proof of adequate coverage before releasing the first draw, so sort this out before closing.

How the Appraisal Sets Your Loan Amount

A standard purchase appraisal looks at what the property is worth today. A rehab loan appraisal looks at what the property will be worth after your renovations are done. That projected number, the “after-improved value” or “as-completed value,” is the foundation of the entire loan.

The appraiser reviews your scope of work, contractor bids, and any architectural plans before estimating the after-improved value. For FHA 203(k) purchase transactions, the maximum insurable mortgage is the lesser of two figures: the as-is value plus all financeable costs (repairs, fees, contingency reserves), or 110% of the after-improved value — 100% for condominiums.⁵ For HomeStyle loans, renovation costs can’t exceed 75% of the lesser of the purchase price plus renovation costs or the as-completed appraised value.⁶

This is where deals run into trouble. If the appraiser doesn’t believe your renovations will add as much value as you hoped, the after-improved value comes in low and the maximum loan shrinks. The gap between what you expected to borrow and what the lender will approve has to come from somewhere. Usually your pocket.

How Renovation Money Reaches Your Contractor

You never receive the renovation funds directly. At closing, the lender splits the proceeds into two streams: the purchase payoff goes to the seller (or the existing lender on a refinance), and the renovation funds land in a restricted escrow account only the lender controls.²

The contractor gets paid on a draw schedule, a series of installments tied to completed milestones spelled out in the scope of work. A typical project might have four to six draws. Before each payment, an inspector, or the HUD Consultant on a Standard 203(k), visits the property to verify the work matches the approved plans. The inspector signs off, and the lender releases the next batch of funds. The final draw doesn’t go out until every inspection is cleared.¹

The process protects everyone. The lender doesn’t pay for unfinished work, and you don’t end up with a half-renovated house and no remaining funds. It also means your contractor must be comfortable working on a draw-based schedule, and not all of them are. Contractors new to 203(k) work sometimes balk at the paperwork and inspection delays. Finding one with rehab loan experience will save you real headaches.

Building the Renovation Plan

The renovation plan is what the lender, appraiser, and (on a Standard 203(k)) HUD Consultant all rely on to decide whether the deal works. A sloppy plan means delays, reduced loan amounts, or outright denial.

The Scope of Work

The scope of work, sometimes called the work write-up, itemizes every repair, every material, and every labor cost. It covers everything from major structural changes down to paint colors and hardware. On a Standard 203(k), the HUD Consultant typically prepares or refines it to meet FHA requirements.⁵ On Limited 203(k) and conventional loans, you and your contractor handle it. Vague line items like “update kitchen — $30,000” won’t fly. Each task needs specific materials, quantities, and costs.

Contractor Rules

Your contractor must be licensed, insured, and in some cases willing to pass a background check. Lenders typically require a detailed fixed-price contract covering the full scope before underwriting proceeds. Get bids from at least two or three contractors: the lender wants competitive pricing, and the appraiser compares bid amounts to local construction costs when valuing the finished product.

Most programs don’t allow you to serve as your own general contractor. Some limited DIY work is permitted under HomeStyle, up to 10% of the completed property value, but only material costs can be financed.⁶ FHA 203(k) technically permits a small amount of self-help work, but in practice most lenders won’t allow it because borrower-performed work has a track record of delays and cost overruns.

Lead Paint on Pre-1978 Homes

If the property was built before 1978, federal rules require attention to lead-based paint. Under FHA programs, any defective paint on surfaces being disturbed during renovation must be tested or presumed to contain lead, then treated by covering, removal, or professional abatement depending on the scope. Machine sanding and open-flame removal methods are prohibited. These rules apply whether or not visible paint damage exists on the surfaces your renovation will disturb. Testing and remediation costs belong in the scope of work and can be financed into the loan.

Permits and Timelines

Local building permits must be obtained before construction starts. On a Standard 203(k), the HUD Consultant confirms they’re in place before authorizing the first draw.¹ Permit fees vary widely, from a couple hundred dollars to several thousand, usually calculated as a percentage of project cost. Budget early. Permit delays are one of the most common reasons rehab projects stall.

And watch the clock. Limited 203(k) renovations must wrap within nine months, Standard 203(k) within twelve, and HomeStyle within twelve months of loan delivery.¹² Extensions are possible in some cases but never guaranteed, and your lender will not be happy about requesting one.

The Application and Closing Reality

Applying for a rehab loan takes longer than a standard mortgage. Expect 45 to 60 days at minimum, sometimes longer for Standard 203(k) projects. The underwriter is reviewing two things at once: whether you qualify financially and whether the renovation project makes sense.

The financial side looks like any other mortgage — income verification, credit pull, asset documentation, DTI calculation. On the project side, the underwriter evaluates the scope of work, the contractor’s qualifications, the appraiser’s after-improved value, and the feasibility of finishing on time. If any piece of the project package is incomplete or the numbers don’t add up, the whole file stalls.

At closing, you sign the mortgage for the full amount: purchase price plus renovation costs, contingency reserves, and any financed fees. The purchase funds go to the seller. The renovation funds go into escrow. You start making mortgage payments on the full loan balance immediately, even though much of the work hasn’t been done. That’s the detail borrowers most often overlook. You’re paying interest on money sitting in escrow while your contractor is still tearing out walls.

1
Department of Housing and Urban Development (HUD). Program Comparison Fact Sheet – FHA 203(k) Rehabilitation Loan Program
2
Office of the Comptroller of the Currency. FHA 203(k) Loan Program Community Developments Fact Sheet
3
U.S. Department of Housing and Urban Development (HUD). 203(k) Rehabilitation Mortgage Insurance Program
4
Federal Housing Finance Agency. FHFA Announces Conforming Loan Limit Values for 2026
5
Federal Deposit Insurance Corporation (FDIC). 203(k) Rehabilitation Mortgage Insurance
6
Fannie Mae. HomeStyle Renovation Mortgages Loan and Borrower Eligibility
7
Fannie Mae. Eligibility Matrix
8
Freddie Mac. CHOICERenovation Mortgage
9
Veterans Affairs. Circular 26-18-6 – VA Renovation Loans
10
Veterans Affairs. Eligibility For VA Home Loan Programs
11
HUD. Standard 203(k) Contingency Reserve Requirements – Help
12
FDIC. Fannie Mae HomeStyle Renovation Mortgage