Massachusetts Home Buyer Guide

A rehabilitation loan allows home buyers to purchase a home that may need repairs or renovations and bundle the costs of those improvements into their mortgage.

For first-time homebuyers, a rehabilitation or rehab loan can be a strategic way to navigate the expensive and often competitive Greater Boston housing market. Homes in move-in condition sell for a premium. Homes needing updating and repairs sometimes sell for below market value, allowing homebuyers access to an otherwise cost-prohibitive neighborhood.

While many prospective homebuyers in the Boston area have the income to pay a mortgage, saving for the down payment and closing costs is daunting. Add in necessary immediate repairs – common with Greater Boston's older housing stock – and home-buying can be out of reach.

Several rehabilitation loan options are available, but two of the most common are the Federal Housing Administration (FHA) 203(k) Rehab Loan and the Fannie Mae "HomeStyle" Renovation loan.

Fannie Mae HomeStyle Renovation Loan

HomeStyle Renovation Loan borrowers can renovate any part of their home, including bathrooms and roofs, or add accessory dwelling units like an in-law suite. Landscaping projects, such as trees, patios, and retaining walls, are eligible. There is no minimum dollar amount, and homebuyers can choose any contractor or subcontractor, pending lender review.

Fannie Mae claims HomeStyle Renovation Loan interest rates may be lower than a home equity line of credit, commonly referred to as a HELOC, personal loans, and other more costly financing options.

Fannie Mae does not require the property to be habitable at closing. If the home is not habitable, the borrower may finance up to six months of principal, interest, tax, and insurance payments to cover these costs while the property remains uninhabitable.

FHA 203(k) Rehab Loan

The 203(k) Rehab Loan program is popular with first-time home buyers because it has lower down payment requirements and more flexible credit score standards.

The 203(k) program allows borrowers to use FHA-insured financing, including the cost of rehabbing, in a single mortgage used to purchase or refinance a home.

The program covers structural repairs such as foundations and new roofs, modernization of kitchens and bathrooms, and projects to increase energy efficiency and climate resilience. Borrowers can also use a 203(k) loan to replace windows or flooring, create accessibility for persons with disabilities, build an eligible accessory dwelling unit, finish attics and basements, or construct a garage.

There are two types of 203(k) loan programs: Limited 203(k) and Standard 203(k). The Standard program, used for larger projects, has a minimum repair cost of $5,000. The Limited program is sometimes referred to as "streamlined." Speaking with a loan officer with experience with rehabilitation loans is critical. As of the date of this post, a lot of information online about these programs needs updating because the FHA has made improvements to the program.

In July 2024, the FHA announced changes to modernize the program and enhance its usefulness for home buyers seeking financing to purchase and rehabilitate a single-family home. The FHA expects the program "enhancements" to increase program usage.

The changes to the program include the following.

• Increasing the allowable total rehabilitation costs a borrower can finance under the Limited 203(k) program from $35,000 to $75,000 and reviewing this limit annually to ensure it continues to keep pace with market conditions;

• Providing more time for rehabilitation and repair work completion by extending the rehabilitation period to 12 months for the Standard 203(k) and nine months for the Limited 203(k);

• Expanding the fees 203(k) consultants can charge for various activities. The FHA last updated the fee schedule in 1995. The FHA said it designed the new fee structure to appropriately compensate consultants for their role and encourage more consultants to participate in the program; and

• Allowing the financing of the 203(k) consultant fee in the total mortgage amount for the Limited 203(k) if a borrower chooses to use a 203(k) consultant. A 203(k) consultant helps prospective home buyers with reports and accurate and detailed repair estimates.

By carefully considering loan options and working with a knowledgeable loan officer, a first-time home buyer willing to take on some projects can open the door to an otherwise unattainable home in the Boston area.