FHA 203(k) Loan
Sometimes, you find the perfect home in the neighborhood you want and it’s move-in ready. But let’s get real. Social media images notwithstanding, you’re more likely to find a house that needs some work. Maybe a lot of work. You see the potential in the home, and you love the neighborhood. Now what? FHA 203(k) to the rescue.
What is an FHA 203(k) loan?
We know. This looks like a string of random letters and numbers. So let’s break it down.
FHA is the Federal Housing Administration, a government agency that backs loans. It’s part of the U.S. Department of Housing and Urban Development (HUD). Because the loans are insured by FHA, lenders approved to offer these loans can be more flexible in their approvals, allowing a lower credit score or a higher debt-to-income ratio, for example. 203(k) refers to the section of the housing code that applies to rehabilitation (renovation) loans.
While it would be great if we could call it the More Flexible So You Can Buy Or Refi And Fix Up Your Home Loan, we’ll have to settle for FHA 203(k).
How does an FHA 203(k) Rehab work?
FHA 203(k) loans combine a home purchase (or refinance) with the cost of qualified repairs, all in one loan. They come in two versions: Limited and Standard.
- A Limited loan is for non-structural improvements costing up to $75,000.
- A Standard loan is for structural and other major improvements costing at least $5,000.
Like all FHA loans, these mortgages have to abide by FHA loan limits for the county where the home is located.
3 stages to an FHA 203(k) loan
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- Identify the home you want to renovate (purchase or refinance)
- Choose an FHA-approved lender (like CrossCountry Mortgage)
- Lender chooses an FHA-approved consultant (optional for a Limited loan)
- Consultant (if required) or contractor visits home, prepares scope of work and cost estimate
- Lender receives write up and bids
- The lender orders an appraisal, and the loan is based on the after-improved value of the home
- Loan is underwritten
- Loan closed, and funded, FHA insures loan, renovations begin
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- Contractor gets necessary permits
- As each stage of the renovation is completed and approved by the borrower and consultant (if used), the contractor receives payments (draws)
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- Borrower provides a release letter
- Consultant (or borrower for a Limited loan) confirms completion and obtains certificate of occupancy or other required documents
- Remaining funds are released to contractor
- Lender closes the project
If you’re buying a home, you should contact a loan originator before you even start looking. That way, you’ll know what you can afford.
If you’re already thinking of buying a fixer-upper, you’ll also find out if you can get an FHA 203(k) or other type of renovation loan. That way, you’ll also understand the additional requirements that come with a renovation loan. The same is true if you want to fix up your current home. Talk to your loan originator about renovation loans before you start planning your improvements.
FHA 203(k) loan requirements
Basic requirements include:
- Property must be owner occupied
- No second homes or investment properties allowed
- You’ll need to meet minimum credit score, down payment, and debt-to-income ratio standards
Types of FHA 203(k) loans
Depending on the type of renovation and the cost, you’ll need either a Standard or Limited loan.
Limited FHA 203(k) Loan
The Limited loan is for non-structural renovations costing up to $75,000. There’s no minimum loan amount. Because the renovations are cosmetic and capped at $75,000, you won’t need an FHA-approved consultant to oversee your project, although you may choose to use one to help you through the renovation process.
Examples of eligible improvements:
- Kitchen remodel (non-structural)
- Appliances
- Bathroom remodel (non-structural)
- Energy efficiency measures
- Flooring
- Painting
- Roof replacement or repair
- HVAC system
- Well repair
- Septic system repair
Standard FHA 203(k) Loan
The Standard loan is for structural and more expensive renovations, with a minimum loan amount of $5,000 and a maximum tied to the FHA loan limit in your area. You must use an FHA-approved consultant throughout your project.
In addition to the items allowed for a Limited loan (see above), here are examples of eligible Standard improvements:
- Structural alterations, such as moving a wall or adding a room
- New well
- New septic system
- Repair structural damage
- Build an accessory dwelling unit (ADU)
- Replace plumbing or electrical systems
FHA 203(k) pros and cons
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- Save time and money by using one loan for the home purchase or refinance and renovations
- Lower credit score requirement than conventional loans
- Lower down payment requirement than some conventional loans
- Interest rate is likely to be lower than credit cards or personal loans
- Can finance up to six months of mortgage payments if you have to live elsewhere during renovations
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- Must live in the home for at least one year
- Required upfront and monthly FHA mortgage insurance payments
- Rates might be higher compared to conventional renovation loans
- Work must be completed within six months, although an extension may be granted
FHA 203(k) FAQs
These are a just few of the most common questions about FHA 203(k) loans. Your loan officer will be happy to talk to you about answer your renovation loan questions.
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If you’re buying, or already own, a home that needs major or minor repairs and improvements, and you need a loan with more flexible credit, down payment, and debt-to-income requirements, this could be the loan for you. Your loan officer can explain your mortgage options.
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Not at all. In fact, because they are FHA insured, and lenders are protected from borrower default by that insurance, qualification is easier than for many other types of loan.
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Yes, they do. They’re considered riskier than loans without a renovation component, so rates are higher. But remember you are saving by taking out one loan for both the purchase/refinance and the improvements, and the amount you can borrow is based on the value of the home after the repairs and upgrades.
