The Victorian government bail-out applies to customers who paid deposits, building had not started and were left without insurance before the company went into liquidation last month.
Premier Daniel Andrews said he believed the scheme would cost about $15 million, averaging about $25,000 per customer.
"They didn't do anything wrong. They have acted in good faith," Mr Andrews told reporters on Thursday.
"Porter Davis for some inexplicable reason have not forwarded on the insurance premiums that have been paid."
Refunds are capped at five per cent of the value of the contract as that is what customers with insurance will also receive.
About 1700 homes across Victoria and Queensland were left in limbo when Porter Davis went into liquidation last month.
The Victorian Building Authority is investigating whether Porter Davis has breached any laws after customers claimed they were left without domestic building insurance despite paying their deposits.
Porter Davis customer Richard Williams told AAP he was relieved by the announcement.
"The messages in the group's WhatsApp chats show tears of joy and relief, with people hugging their families," Mr Williams said.
"We will be able to sleep tonight for the first time in three weeks."
Fellow customer Eric Poon said the announcement restored confidence in the industry but there was still a long way to go until his family could finally build and move into their dream house.
"We are now facing higher costs, as renegotiating a new construction contract comes with a 20 per cent increase in comparison to the original Porter Davis agreement. The time wasted in this process is an additional burden," he said.
The state government is working with liquidator Grant Thornton to understand exactly how many customers without insurance had already started building.
Mr Andrews signalled those customers would also be eligible for support in the future and it would make sense if incomplete projects could be sold on to other builders.
"We just need a little bit more time to firm that up, to have a better sense (of how many are impacted)," he said.
On Wednesday it was revealed the company collapsed owing close to $33 million to the Commonwealth Bank on top of other debts.
The liquidator is still trying to determine Porter Davis's overall financial position.
Mr Andrews said it was likely that a buyer would be found for a part of Porter Davis responsible for building apartment blocks.
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