The Federal Housing Administration has been issuing rehab, or rehabilitation, loans since 1961. The loans fund such projects as adding extra rooms to a home or updating a bathroom or a kitchen.
Some rehabilitation loans allow qualifying homeowners to utilize the equity they have in their home to add value to the home through additional rooms, renovations or landscaping. Conventional loans are available to qualifying homeowners who can afford a down payment.
Loans such as the FHA 203k loan and the Fannie Mae HomeStyle loans are backed by the federal government and have their own specific guidelines (see Resources).
A homeowner can use both a conventional loan and a government-backed renovation loan to buy a distressed home and renovate it. These combination loans assess both the home's current value and the estimated value of the home after the renovation, and that difference serves as equity.
All types of rehab loans require credit checks, income verification and an appraisal of the home. The renovations planned must add value to the home. For FHA 203k loans, you must begin with a foreclosed and/or distressed property to qualify.
Do your research before buying properties in need of renovation and before hiring a contractor to complete it. Also, apply for the rehab loans through credible financial institutions, such as banks and well-known mortgage companies, to avoid possible scams.