Rehabilitation Mortgage
Definition and meaning of Rehabilitation Mortgage in real estate.
A rehabilitation mortgage is a specialized home loan that covers both the purchase price of a property and the estimated costs of repairing, renovating, or improving it.
In more detail
This type of loan is ideal for buyers looking to purchase a fixer-upper or a property in need of major structural repairs. Instead of requiring two separate loans, it combines the acquisition and construction costs into a single mortgage with one set of closing fees.
The funds designated for repairs are held in an escrow account and released in installments to contractors as the work is completed and inspected. The Federal Housing Administration's Section 203(k) program is one of the most common rehabilitation mortgages used by home buyers.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Also known as | Renovation loan or FHA 203k loan |
| Funding structure | Single loan with repair funds held in escrow |
| Requires | Contractor bids and inspections |
A buyer used a rehabilitation mortgage to purchase a distressed property and secure additional funds to completely remodel the kitchen and bathrooms.
Frequently asked questions
How does a rehabilitation mortgage differ from a traditional mortgage?
A traditional mortgage only funds the current value of the home, whereas a rehabilitation mortgage funds the purchase plus the cost of improvements based on the home's projected value after repairs.
Can you use a rehabilitation mortgage to do the work yourself?
Most lenders require licensed, professional contractors to perform the work to ensure it is completed correctly and meets local building codes.