Rehab Loan

Have you ever looked at a piece of property in Mass. and thought to yourself “this house is a great fixer upper”. Then the different renovation products might be just what you need. Renovation mortgages or “renos” for short allow you to use the lender’s money to finance the repairs & improvements to your new home.

There are 2 basic types of renovation loans – the FHA 203k loan and the Fannie Mae Homestyle loan. Both mortgage products will lend you money based on the fair market value of the home after the improvements have been made. Many homes for sale in Mass. are the result of a short sale or foreclosure, and unfortunately many of the properties have not been given the care they needed to be in “lendable” condition. These particular Mass. properties are perfect for the FHA 203k loan or for the Fannie Mae Homestyle loan.

FHA 203k Mortgage Loan Basics

The most popular of the MA renovation mortgages is the FHA 203k loan. This loan is a typical FHA mortgage in the respect that it has similar underwriting guidelines as to credit, income, and down payment, but it allows you to utilize the banks funds to fix up your property of choice.

What is a Full FHA 203k vs. Streamline 203k?

  • The difference is the amount of repairs. Over $35,000 is considered a Full FHA 203k where as less than $35,000 is a Streamline 203k

What is the Process for Obtaining a 203K Mortgage?

  • Find A Home In Need of Renovation
  • Perform a Feasibility Analysis – detail the extent & cost of rehab work required, and the expected fair market value after completion
  • Submit Offer to Seller
  • Contractor prepares formal bid proposal itemizing material and labor costs. This will determine which type of 203K loan that will best suit your needs. Contractor provides supporting documentation proving licensing, insurance and bonding & three letters of recommendation from past clients.
  • Sign Purchase & Sale Agreement
  • Submit Loan to Underwriting along with cost estimate & details of work to be completed from contractor
  • HUD approved Counselor visits property to determine estimates & scope of work is in line with documentation provided
  • Appraisal completed estimating fair market value after renovation
  • Loan Approval & Clearing Conditions
  • Closing – Seller is paid money, and remaining funds held by the Lender in rehab account
  • Rehab Construction Begins
  • Funds released (draws) requested by contractor & approved only after HUD counselor inspect & signs off on work
  • Construction must be completed within 6 months of close

How is the loan amount calculated on a 203K Mortgage?

  • The base mortgage is 96.5% of the lesser of (1) Sales price + Total Rehab Costs,  or (2) 110% of Fair Market Value after the renovations have been completed

What type of properties can I use my 203k loan for ?

  • A FHA 203(k) Loan can be used for one–to–four unit dwellings & Condominiums
  • Conversions from single family to multi, and multi family to single are also allowed

Fannie Mae Homestyle Renovation Mortgage

Fannie Mae’s renovation loan product is called the Fannie Mae Homestyle loan. In this Mass. real estate market there is a growing opportunity for home buyers to build equity with a “fixer upper”. Fannie Mae’s renovation loan is a great mortgage for all borrowers. Whereas the FHA 203k loan is reserved for owner occupied primary residences, the Fannie Homestyle mortgage can be utilized on second homes and investment properties.

Here are some key underwriting points on the Fannie rehab loan

Property Type                         LTV                Down Payment

1 unit primary                          95% (MI required)             5%

2-4 unit primary                       75%                                25%

Condo primary                         80%                               20%

Second Home                         80%                                20%

Investment Property                75%                                25%


  • 680 Minimum FICO for owner occupied & 2nd home loans
  • 720 Minimum FICO for investment properties
  • There is no minimum rehab amount.
  • The maximum renovation costs can be as much as 50% of the as-completed value (ex. if you buy the home for $100,000 and the after-completion value is $200,000, you can use up to $100,000 for rehab)
  • If the borrowers are unable to occupy the property during the rehab, owner-occupants may finance PITI for any payments due during the time that property is expected to be vacant due to construction (with a maximum of six monthly payments).
  • A Contingency Reserve equal to 10% of the cost of the rehabilitation is required.
  • All rehab funds, including contingency reserve, are placed in the escrow.
  • Unused contingency funds must be applied to reduce the balance of the mortgage unless the contingency reserve was provided from the borrower’s own funds; or the borrower may elect to pay for any additional elective repairs or improvements.

Tips & Traps

    • Get your contractors lined up early with their bids and necessary documentation
    • Make sure the repairs you are looking to do fit the program guidelines
    • Make sure you factor in the Contingency Reserve requirement of 10%-15% as part of your budget
    • Rehab loans take 60-90 days to close. Set your loan commitment & closing dates with this time frame in mind
    • A slightly higher rate will apply to rehab loans
    • If you can not live in the home while rehab is taking place, don’t forget to budget for up to 6 months of mortgage payments (which can be included in the loan)
    • Specify in your initial offer to the seller that you will be applying for a rehab loan


  • Don’t cut corners with your repairs
  • “Sweat Equity” is generally not an option – you must use a licensed 3rd party contactor to complete the rehab work
  • Don’t forget to budget for additional closing costs associated with a rehab loan – inspection fees, title updates, draw request fees
  • Work with your lender. Sometimes it may seem like the lender is asking for too much paperwork. Try to be thorough, organized and review all of your documentation before sending it over.

Note: The most common use of the 203K & Fannie Mae Homestyle loan in Massachusetts is to repair failed septic systems per the Title V requirements.