How to get a rehab loan for a house

Renovating a house can breathe new life into an aging property. Not only can this help make your dream home a reality, but it also improves its value and makes the space more comfortable to live in. 

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However, given the cost of upgrades, especially for larger or more ambitious projects, it can feel overwhelming to take the leap. Cue rehab loans—specialized financing designed to make home improvements accessible, whether looking at a fixer-upper or upgrading your current residence. 

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This post will explore how to secure financing for improvements and loan options available for homebuyers and homeowners. 

How to get a rehab loan for a house

1. Budget: Determine the scope of your home improvement project and create a detailed budget. Include estimates for materials, labor, and permits—not to mention unexpected expenses. Identify a range for how much you’ll need to borrow. 
2. Check your financial health: Review your credit score, debt-to-income (DTI) ratio, and income to understand what products are available to you. Also, consider looking at your assets, like home equity and 401(k)s, to broaden your options. 
3. Shop around and prequalify: Compare various lenders and options to find the most favorable loan terms and interest rates. You’ll also want to prequalify where possible to get insight into your eligibility without affecting your credit score. 
4. Apply: Gather the necessary documents you’ll need to provide—typically proof of income and assets. However, in general, be prepared to provide details about your renovation plans, financial situation, and property.

10 Rehab loans for houses

The best type of loan for home improvements is one that fits your budget and needs while also offering favorable terms. Because these are all factors unique to an individual’s situation, there’s no one-size-fits-all. Instead, carefully review your options to determine what makes sense for you. 

Fannie Mae Homestyle renovation loan

If you're eyeing a fixer-upper purchase, the Fannie Mae Homestyle Renovation Loan can help you bundle the cost of purchasing and renovating a home into one mortgage. It offers competitive interest rates and can be used for various renovations, like structural repairs, energy-efficiency upgrades, and even luxury improvements. Eligibility and terms vary depending on the property and homebuyer. 

Freddie Mac CHOICERenovation loan

With a Freddie Mac CHOICERenovation loan, you can finance renovations for a current primary residence or one you intend to purchase. The loan program provides funding for renovations that make a property habitable or increase its value. It’s similar to the Fannie Mae Homestyle loan but includes an option to finance disaster-proofing renovations. In addition to meeting property and credit score requirements, you’ll need to work with an approved lender. 

Freddie Mac CHOICEReno eXPress loan

If you have a small-scale renovation project, you can take advantage of the CHOICEReno eXPress Loan for simpler documentation requirements and faster processing times. The funds can be used for minor improvements, making it convenient for projects with lower budgets. Requirements and terms vary based on financial health, property, and location. 

FHA 203(k) loan

The Federal Housing Administration (FHA) offers two flexible rehab loans for houses—the Standard 203(k) and Limited 203(k). Both roll the cost of purchasing and renovating a home into a single mortgage. The Standard 203(k) is suited for extensive repairs, allowing homeowners to finance up to $75,000. The Limited 203(k) is best for smaller projects as the loan is capped at  $35,000. 

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FHA loans typically work with borrowers who have lower credit scores and little to no down payment, making them an accessible option for many individuals.

VA renovation loan

VA renovation loans, also called VA rehab loans, help eligible military members, veterans, and their families finance improvements needed to meet safety and livability standards. Interest rates are competitive, and no down payment or mortgage insurance is needed, which makes it an excellent option for borrowers. However, you'll need a 620 credit score or higher and an approved lender to qualify. 

USDA renovation loan

Those in rural or suburban areas may wish to explore the USDA Renovation Loan. It offers affordable financing for low- to moderate-income borrowers to improve or modernize their homes. The program also provides grants to elderly low-income homeowners to remove health and safety hazards. The maximum loan amount is $40,000, while the maximum grant is $10,000—no down payment is required. 

Home improvement loan

Home improvement loans are one of the most common ways to tackle property improvements and upgrades. These types of loans are unsecured and can either be renovation-specific or used for any purpose. They typically have higher fixed interest rates than secured loans, but they offer more flexibility and funding within days. Unsecured personal loans also come with origination fees.

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You'll need sufficient income, a good credit score, and a low debt-to-income ratio (DTI) to qualify. 

Home equity loan

If you've built sufficient equity in your home, you can unlock it to make your reno dreams a reality. 

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A home equity loan provides a lump sum in exchange for monthly payments over a 5 to 30-year loan term. Interest rates are fixed and higher than government-backed loans but typically lower than unsecured loans. 

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Equity financing does come with closing costs and other fees to consider. Since your home is used as collateral, a lender can foreclose if you default on your payments. 

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To qualify, you'll need a credit score above 620, a DTI of 43% or less, and sufficient income and equity. 

Home equity line of credit (HELOC)

A HELOC allows you to draw on your home's equity for a revolving line of credit. You can use the funds as needed during the draw period and are only responsible for interest payments. Once repayment begins, you'll pay back the balance plus interest through monthly payments. The loan offers a great deal of flexibility and is ideal for ongoing renovation projects. 

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This type of financing comes with variable interest rates that are more favorable than other debt products. 

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Borrowers generally need to have a credit score above 620, a DTI below 43%, at least 20% owned equity, and sufficient income to qualify for a HELOC. 

Home equity investment (HEI)

A home equity investment may not be a traditional loan, but is a great solution if you have non-traditional income, low income, or a low credit score. 

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You can tap into your equity for a single lump sum payout in exchange for a share of the future appreciation. There are no monthly payments over a 30-year term; you settle the investment when you sell the property, refinance, or use an alternative source of funds.

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You'll need a credit score above 500, sufficient equity, and a home in an eligible location to qualify. It's also possible to prequalify and get an offer without commitment to continue or impacting your credit score. 

Final thoughts

A rehab loan can help you transform a property into your dream home—or a profitable investment. Whether exploring government-backed or personal loans for home repairs, there's no shortage of options. However, it pays to assess your opportunities carefully and choose a solution best suited to your needs. 

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Accomplish your home renovation goals with a Home Equity Investment from Point. You can tap into your equity with no monthly payments, no income requirements, and no need for perfect credit. Learn more at point.com. 

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