Written and reviewed by Jack Gladden, Senior Loan Officer, NMLS #1470164
Updated · 6-minute read · How these guides are written
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Rehab and code-case loans in brief
- What they are
- Loans that buy or refinance a property and pay for the repairs, often while a code case, open permit or lien is being cleared.
- If you’ll live there
- FHA 203(k), Fannie Mae HomeStyle and VA renovation loans roll the repairs into a long-term mortgage, from 3.5% down with FHA.
- If you’re investing
- Short-term rehab or fix-and-flip loans, usually 12 to 24 months and interest-only, with the repair money released in draws.
- How much down
- Investors typically put in 10% or more of the total project cost; the lender caps the loan by both cost and after-repair value.
- The exit
- Sell, or refinance into a long-term or DSCR loan once the work is done and the case is closed.
- Where
- Homes in California, Arizona, Florida and Ohio; investor rehab loans nationwide where permitted.
Which rehab loan fits?
Two questions decide it: will you live in the property, and can a regular lender accept it in its current condition?
Owner renovation loan
FHA 203(k), HomeStyle or VA renovation: a 15- or 30-year mortgage that includes the repairs, paid from an escrow as the work is done. You qualify on your income and credit.
Best forA home you’ll live in that a lender can accept as it is
Investor rehab loan
Fix-and-flip or rehab-to-rental: usually 12 to 24 months, interest-only, with repairs paid in draws after inspections. Sized on the deal, your experience and your cash.
Best forA property you’ll flip or rent
Bridge, then refinance
A private or bridge lender, usually for 6 to 24 months, while violations are fixed or work is permitted. Based on the property’s value and the exit.
Best forA property no regular lender will take yet
Owner renovation loans are covered in detail on renovation loans. They need the work to be fixable on a set budget and timeline: FHA 203(k) work must generally be finished within 12 months. A property with serious violations, an unfinished structure or work a city must sign off first often needs a short-term lender before it can get there.
Code cases, liens and unpermitted work.
- Open code case
- A city or county order to fix a violation. Until it’s closed, many lenders and buyers won’t proceed, and daily fines can keep adding up.
- Code lien
- In Florida, for example, a recorded fine order becomes a lien on the property. Fines can run up to $250 a day for a first violation, $500 for a repeat, and more in larger cities that adopt higher limits, until the property complies.
- Unpermitted additions
- Fannie Mae has the appraiser comment on the quality of unpermitted work and its effect on value. Well-built work can still count; poor work may count for nothing or need removing.
- Non-conforming units
- A unit zoning doesn’t allow can still be financed conventionally in some cases: it must be typical for the area, insurable, and supported by comparable sales.
- Open or expired permits
- These don’t always show on a title report. A permit and municipal lien search before you buy or refinance finds them.
Get the records
Notices, the permit history and a municipal lien search, so the full scope is known.
Price the fix
A contractor bid for the corrections, plus permit, plan and inspection costs.
Choose a path
Legalize the work, remove it, or sell as-is to a buyer with rehab financing.
Finance it
Fold the repairs, and often the lien payoff, into one loan.
Close the case
Final inspection and sign-off. Many cities reduce accrued fines once the property complies; Florida law expressly allows it.
Have a notice or an open case?
Send me the address and any notices or permit records. I’ll tell you which lenders will finance it as it is today.
How investor rehab loans work.
Fix-and-flip and rehab lenders size the loan on the project, not your tax returns. Two caps apply, and the lower one wins.
Loan = the lower of a share of total cost and a share of after-repair value
Total cost is the purchase price plus the repair budget. After-repair value (ARV) is the appraiser’s estimate of the finished property.
| Example | Amount |
|---|---|
| Purchase price | $300,000 |
| Repair budget | $100,000 |
| 90% of the $400,000 total cost | $360,000 |
| 70% of a $550,000 after-repair value | $385,000 |
| Loan (the lower cap) | $360,000 |
Here the investor brings $40,000 plus closing costs and carrying costs. If the after-repair value were lower, the ARV cap would bind and more cash would be needed.
Typical terms
- Leverage
- Up to about 90% of the purchase and up to 100% of the repairs for experienced investors; less for a first project.
- Term and payments
- 12 to 24 months, usually interest-only, often with an extension option for a fee.
- Draws
- You or your contractor complete a stage, an inspector verifies it, and the lender reimburses that part of the budget.
- Costs
- Higher rates than a mortgage, plus origination points; some lenders let you finance the points.
- What they check
- Your track record, cash for the down payment and reserves, the contractor, the budget and the exit plan.
The refinance after.
- Keep it as a rental
- Refinance into a DSCR loan based on the rent, or a conventional investment loan. Many lenders use the new appraised value after about six months of ownership.
- Move in
- Refinance into a long-term mortgage once the property meets standard lending requirements and the case is closed.
- Sell
- The sale pays off the rehab loan; plan the timeline so the sale closes before the term ends.
I plan the exit before you close, so the rehab loan’s term, the appraisal and the case sign-off line up with the refinance.
The risks.
- Scope surprises. Opening walls on unpermitted work often finds more to fix; budget a contingency.
- Permit delays. Plan review and inspections can take longer than the work itself, and interest runs the whole time.
- Draw timing. Draws reimburse finished work, so you or your contractor carry each stage until it’s inspected.
- Value risk. If the after-repair value comes in low, the refinance or sale may not cover the loan.
- Term risk. Short-term loans come due, and extensions cost extra.
How we get started.
Tell me about the property
The address, the issue, any notices, and whether you’ll live there, rent it or sell.
I find the right lender
Owner renovation, investor rehab or bridge lenders who accept the property as it is.
Approval
Including the budget, the contractor and the after-repair appraisal.
Close, fix and clear
Draws through the work, then the case sign-off and the refinance or sale.
Rehab and code-case loans, answered plainly.
How much do you need to put down on a rehab loan?
For a home you’ll live in, an FHA 203(k) starts at 3.5% down. Investor rehab loans usually need 10% or more of the total cost, plus closing and carrying costs.
What is a rehab loan and how does it work?
One loan for the purchase or refinance and the repairs. The repair money sits with the lender and is paid out as the work is finished and inspected.
How hard is it to qualify for a rehab loan?
Harder than a standard mortgage: the lender reviews you, the budget, the contractor and the after-repair value. Investor lenders also look at your experience and cash. See also: DSCR vs hard money loans.
Is a 203(k) loan hard to get?
It takes more paperwork than a regular FHA loan, but the credit rules are FHA’s. See renovation loans for the details.
Can I refinance a home with unpermitted work?
Sometimes. If the appraiser finds the work well built and typical for the area, it may be acceptable. Otherwise a rehab or bridge lender can finance it while the work is permitted or removed, then you refinance.
Will the lender pay off the city’s liens?
Many rehab and bridge lenders can pay recorded code liens and fines at closing, so the title is clear. See also: Construction & bridge loans.
How long does a rehab loan last?
Investor rehab loans usually run 12 to 24 months. Owner renovation loans are 15- or 30-year mortgages, with the work generally finished within months.
Is it hard to get approved for a 203(k) loan?
Not much harder than a regular FHA loan for you. The extra steps are the contractor bids, a consultant on larger projects and more paperwork, which is why fewer lenders offer it. I work with lenders that do them regularly.
Is a rehab loan worth it?
When the house is a good buy because of its condition, often yes: one loan covers the purchase and the repairs, based on the value after the work. It’s slower than a regular purchase, so it fits buyers who can wait for the work to finish.
Construction & bridge
Renovation
DSCR & investor
Cash-out refinance