If you’re thinking about renovating your home, doing major home repairs, or purchasing a new house that requires extensive work, a rehab loan can provide you with the financing you need. A home repair or renovation can cost thousands or even tens of thousands of dollars. Understanding your financing options is crucial to managing your budget and planning a project you can afford. Learn more about what a rehab loan is and how common rehab loan options work so you can prepare for your project.

What Is an FHA Rehab Loan?

An FHA 203(k) loan is a type of mortgage that allows homebuyers to access instant equity in the properties they’re purchasing. This type of loan is for owner-occupied properties, so you may not use it to fix and flip properties. A specialized short-term fix and flip loan is better for this purpose. An FHA rehab loan can help you immediately access the funds needed to repair a fixer-upper so you can purchase an affordable property and start adding your own improvements to it right away.

To qualify for an FHA 203(k) loan, you must typically:

  • Make a down payment of at least 3.5%.
  • Have a credit score of 580 or higher.
  • Have a debt-to-income ratio under 43%.

Standard vs. Limited FHA 203(k) Loans

Exterior view of new house under construction and painting.House Painting in morning

There are two types of FHA 203(k) loans: Standard and Limited. The Limited 203(k) was previously known as the FHA 203(k) Streamline. The amount you plan to spend and the scope of your repairs will determine which option is right for you.

The Limited 203(k) requires less paperwork and typically offers a faster approval process. However, this loan is capped at $35,000. The home must be habitable for the duration of the renovation, so you may not use this loan if you’re planning a project that will prevent you from living on-site. The Limited 203(k) allows you to pay your contractor in two payments, so you can provide part of the sum up front and the remainder upon completion.

There is no cap on a Standard FHA 203(k) loan as long as the total for the repair costs and purchase price fall within the FHA lending limits for your county. Standard 203(k) loans must be at least $5,000. You are permitted to make repairs that will leave the home uninhabitable for up to six months. You must hire a HUD consultant to oversee the project when using a Standard 203(k) loan. The consultant will monitor construction and make payments to the appropriate professionals as each phase of the project reaches completion.

You must use a Standard FHA 203(k) loan for projects that require:

  • Architectural exhibits or detailed drawings.
  • A plan reviewer.
  • A work schedule longer than three months.
  • More than two payments per specialized contractor.
  • Delayed work that cannot start within 30 days of closing.

What Can I Use FHA 203(k) Financing For?

You may use your FHA 203(k) loan for a number of different repairs and renovations. The type of loan you choose will determine which repairs are permitted.

You can use an FHA 203(k) Limited loan for:

  • Repairs to the roof, gutters, flooring, or plumbing.
  • New roofing, gutters, flooring, or plumbing.
  • Repairs, replacement, or upgrades to the electrical system, plumbing system, or HVAC system.
  • Replacement windows, doors, or siding.
  • Interior or exterior painting.
  • New appliances and appliance installation.
  • Stabilization or abatement of lead-based paint hazards.
  • Repairs or replacement of a septic system or well.
  • Repair, replacement, or addition of patios, porches, or decks.
  • Waterproofing for the basement.
  • Energy-efficiency improvements such as insulation and weatherization.
  • Accessibility improvements for persons with disabilities.
  • Remodeling that does not include structural repairs.

An FHA 203(k) Standard loan provides for more extensive projects. You can use this loan for:

  • New construction, such as a room addition.
  • Sidewalk or driveway repairs.
  • Repairing termite damage.
  • Repairing structural damage.
  • Major rehabilitation.
  • Landscape improvements.

How Does a Rehab Loan Work?

If you’re familiar with the process of obtaining a home loan, you’ll find many similarities between a regular mortgage and an FHA 203(k) rehab loan. You’ll typically follow these steps:

  1. Find a lender who is familiar with 203(k) rehab loans. It’s important to work with a company that has experience with this type of loan so you can enjoy the smoothest loan process possible. While other lenders may be able to provide you with an FHA 203(k) loan, you may find that certain steps are delayed if they’re learning the process alongside you. 
  2. Outline your repair or renovation plans and get bids for the project. You cannot complete any of the work yourself when you’re using an FHA 203(k) loan. You must work with a licensed and insured contractor. In most cases, the contractor must be employed in this job full time.
  3. Submit your loan application along with the necessary contractor bids. 
  4. Close on the loan upon approval. Your lender will let you know if you need to bring additional paperwork to the closing.
  5. Begin your renovation. Your lender will track and verify the work that’s done to the home, so you must use the funds as you outlined in your loan application.

Alternatives to an FHA 203(k) Rehab Loan

If the limitations of an FHA 203(k) rehab loan are too confining, other options are available to you. Hard money rehab loans provide home improvement funds that are backed by a hard asset. In most cases, this asset is your property. Hard money loans typically range from $100,000 to $5 million, so they’re good for large projects that may fall beyond the limits of an FHA loan. A hard money loan allows you to close on your property fast and typically provides a term of one to three years.

If you’re interested in exploring your loan options for a rehab project for your home, Titan Funding can help. We offer FHA loans, conventional loans, hard money loans, and fix and flip loans, so there are several avenues that you can explore. We’ll help you evaluate your needs and find the best loan for your individual project. Contact us now to get started.