Insights, Mortgages & Renting

How Does A Rehab Loan Work? Your Complete Guide To An FHA 203K Rehab Loan

flik eco finance personal how does a 203k rehab loan work

Found your dream home, but it needs some love before it's liveable? Your dream home likely isn't sitting there waiting. Creating a home that you genuinely love takes considerable time and effort. Whether you're a first-time buyer or renovating your current home, making it yours is what turns brick and mortar into a place to love, laugh, live and raise a family.

If you're creating your dream home but don't have the funds yet — and frankly, who does have $50,000 laying around for a renovation — there is thankfully something called a 203K Rehab Home Loan. This loan allows you to both purchase and renovate your new house (or your old one) all in one simple loan. It is by far the best way to afford a home that needs work.

How Does a Rehab Loan Work Table of Contents

What Is An FHA 203K Rehab Loan?

How Do Home Rehab Loans Work?

How Do I Apply For A 203K Loan?

What Are The Different Types Of 203K Rehab Loans?

What Can You Use A Rehab Loan For?

How Can I Qualify For A Rehab Home Loan?

Rehab Loan Rates & Mortgage Insurance

What Are The Benefits Of A Rehab Loan?

Who Are The Top FHA 203K Rehab Loan Providers

What Is An FHA 203K Rehab Loan?

So what exactly is a 203K rehab home loan? It means you can buy your house, make necessary renovations, or refinance your existing property that needs updating. In short, a 203K rehab home loan is a loan that combines multiple loans into one monthly payment.

The rehab loan or 'renovation loan' puts everything into a singular mortgage and makes the cost of that perfect renovation you've been daydreaming about for months all the more possible. Whether you're making updates to your current home or buying a property that needs some work put into it, this is where 203K loans come in. So, how does a rehab loan work exactly?

How Do Home Rehab Loans Work?

Ever wondered how home rehab loans work? Imagine buying, refinancing, and renovating your dream home all under a single mortgage. Sounds too good to be true, right? But hold your horses, because that's precisely what rehab loans, specifically the 203k loans, are designed to do.

Think about this: You've just bought a house and it needs a $20,000 facelift. Paying all that out of pocket at once? Yeah, that's about as feasible as finding a unicorn in your backyard. Especially when, according to Bank Rate, the average monthly loan payment in the U.S. clocks in at a whopping $1487. And don't get us started on average renovation costs!

Enter the 203k rehab loan, your financial superhero. Instead of an impossible lump-sum payment, this loan lets you make manageable monthly payments towards buying and renovating your home. It's like slicing your financial burden into bite-sized pieces. Handy, right? With a 203k loan, turning that fixer-upper into your dream home just got a whole lot easier. Talk about a game-changer!

How Do I Apply For A 203K Loan?

So how do you apply for a 203K rehab loan? And what are the exact steps involved?

Find Home

Firstly, find a home that requires renovations. This could be the home you're in now or a property you've seen that needs some love and attention before moving in. Once you've found this, it's time to start applying for your loan. But there's one super-important thing you need to remember; you CAN NOT purchase a derelict property with a 203k rehab loan, so be very careful when purchasing that trendy rustic farmhouse.

Apply For a Home 203K Loan

Next, you need to apply for your loan. You need to apply for a rehab loan with an FHA-approved lender as not all mortgage companies have this certification. We'll let you know about some of the best FHA-approved companies later in this post.

Gather Bids

After applying, you will need to find licensed contractors to do renovations. This is super vital as rehab loans are only available when a licensed contractor is doing the work on your home. 

This, unfortunately, means no DIY. Yep, this sucks and brings costs up significantly, but if you want a rehab loan, it's how it has to be. You will need to gather different bids from contractors in your area with exact numbers and figures. These bids will go to you and the mortgage company.

After the Bid: Lender Appraisal

After the bid, the lender will receive an appraisal for both the current house value and the value of your new home after the renovations are complete. This is also when the best-suited (best bidding) contractor is chosen.

Lender Underwrites the Loan

The mortgage company then 'underwrites' the loan and may need more details from you at this stage. This stage can often be frustratingly time-consuming, but work will be almost underway once the lender has everything they need from you and the contractor.

Loan Money Distributed

After the loan is underwritten, the loan money is distributed. Some money goes to the home seller, and some go into an escrow account to cover the renovations costs. (These are paid to the contractor so they can start the work.)

Contractor Begins Work

The contractors then begin the work and start creating your dream home. Unfortunately, you can't do anything yourself because of the loan terms. So essentially, you can relax, sit back, and watch as your dream renovation comes to life.


When you move in depends on the loan. Some require you to move in within 60 days of the loan's date, whereas most lenders allow you to move in once renovations are complete. When the contractors have finished all your renovations, and you're happy with everything, you get the keys, and Woah, you're moving into your dream home. 

What Are The Different Types Of 203K Rehab Loans?

Now you know how 203Ks work; what are the different types of rehab loans? There are two types of 203Ks; Limited and Standard. Let's take a look at some of the differences.

Limited Streamline 203K Rehab Loan

A limited 203K rehab loan allows you to make limited changes to your property. If you've got a fixer-upper, you'll need a limited 203K.

With a limited loan, you can't make structural changes to the building, and there is a $35,000 maximum finance limit for repairs. These loans are perfect for making minor changes, for example:

  • Painting (interior and exterior)
  • Waterproofing
  • Guttering
  • Roof repairs
  • Accessibility changes

Essentially, this loan allows you to make more minor non-structural changes to your property to modernize and spruce it up!

Standard Full 203K Rehab Loan

The full 203K rehab loan is the big one. This is the loan you need if you're buying a property that needs significant renovations before moving in. Full structural changes can be made with this loan, and the property can even be flattened and completely rebuilt, as long as part of the foundations remains.

There's no max repair finance amount as long as it's still below the maximum for your area. There are many renovations you can make with a standard 203K loan, and although you won't be making the changes yourself, a licensed contractor can:

  • Structural improvement
  • Plumbing
  • Electrics
  • Hazard reduction
  • Sewage repairs
  • Roofing
  • Landscaping
  • Conversions
  • Groundwork
  • Accessibility
  • Aesthetics

If you're making BIG changes to your property, this is the loan you need.

What Can You Use A Rehab Loan For?

As stated above, exactly what you use your loan for depends on your needs and the type of mortgage you take out. If you're making small non-structural changes to your home, you need a limited loan, whereas, for large changes, you'll need a full rehab loan. Whichever loan you choose, however, the main reasons for using a 203K rehab loan are:

  • Buying a home that needs renovating
  • Renovating your current home
  • Making any changes to your home that you can't pay for out of pocket
  • Combining buying and renovating costs under one loan

There are so many reasons for taking out a 203K rehab loan, but if you need to make changes that you can't pay for out of pocket in one lump sum, you're going to need one.

How Can I Qualify For A Rehab Home Loan?

Unfortunately, not everyone can rock up and take out a 203K rehab loan. As with most mortgages, there are specific criteria you need to meet. These include:

  • Property that needs renovating
  • Qualified mortgage lender
  • Credit score above 580
  • 3.5% down payment
  • US citizenship
  • Good income/debt ratio
  • Reliable income
  • Proof of primary residence

All of these factors are considered when determining if you'll be accepted for a loan, so it's super important to get everything ready before applying. The last thing you want is to find your perfect home, mortgage lender, and proof of primary residence only for your credit score to let you down. That would suck!

Rehab Loan Interest Rates & Mortgage Insurance

With rehab loans, interest rates are generally a tad higher than traditional mortgages, so expect to pay 0.75 - 1% higher than your standard home loan. In addition to this, you'll also need to pay mortgage insurance. This is usually 1.75% of the total loan amount and is added to your monthly repayment.

What Are The Benefits Of A Rehab Loan?

The rehab loan has some incredible benefits that bring you closer to your dream home or truly maximize the potential of your existing one. Here are some of those benefits:

  • 1 Loan Payment
  • Affordable renovation
  • Low Down Payment rate
  • Simple loan requirements
  • Low-Interest rates
  • Tax benefits

Now that you know some of the fantastic benefits you'll gain, where can you get these loans?

Who Are The Top FHA 203K Rehab Loan Providers

So, where do you grab one of these loans from? The most essential factor you NEED to consider when taking out a 203K loan is if the company is FHA approved. It means they are allowed to offer you these types of renovation loans. Some of the best companies include:

  • LoadDepot
  • WinTrust
  • Caliber
  • Flagstar
  • HomeBridge
  • Fairway

These companies all have a solid reputation, and while you'll need to do your research before choosing a company, these are our top picks.

Ready to Commit?

Do you feel it yet? You know, the excitement of moving into your dream home? We hope this post has made it feel like you're a step closer. Now you know the answers to the main questions we tried to answer in this article. What is an FHA 203K rehab loan? And How does a rehab loan work? You also know how to get one, where to get one, and the steps involved. 

To recap, here's the main point of this article summarized: 

  • Purchase and renovation costs all in 1 loan 
  • Renovation costs are made affordable by 203K loans
  • There are many individual steps involved with getting a 203K loan (see section) 
  • You'll need a credit score of 580+ and proof that the home will be your primary residence.
  • You can take a limited loan for small changes and a full 203K for major changes.

Know anyone else looking to buy their first home or make renovations? If you found this article helpful, please share it with your friends to help them out too.


About Jermaine Hagan (The Plantsman)

Jermaine Hagan, also known as The Plantsman is the Founder of Flik Eco. Jermaine is the perfect hybrid of personal finance expert and nemophilist. On a mission to make personal finance simple and accessible, Jermaine uses his inside knowledge to help the average Joe, Kwame or Sarah to improve their lives. Before founding Flik Eco, Jermaine managed teams across several large financial companies, including Equifax, Admiral Plc, New Wave Capital & HSBC. He has been featured in several large publications including BBC, The Guardian & The Times.

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