FHA 203(k): The Federal Fixer-Upper Loan

Federal Housing Administration Mortgage, Mortgages, Types of Mortgages

Imagine being this close to calling it quits on your house search – and then it happens. You find THE house AND it’s in your price range.

Granted, it’s affordable because it needs some serious repairs, rehab and renovation, but you love it and you’re willing to do what it takes to transform your fixer-upper from a before to an after.

Now, before you start redesigning the front yard, you’ll need to figure out how you’re going to afford a 20% mortgage down payment and take the house from eyesore to eye-catching.

If money is a problem, an FHA 203(k) loan may be the solution.

What Is an FHA 203(k) Loan? A Design for Living

Backed by the Federal Housing Administration, FHA 203(k) mortgage loans – also known as FHA 203(k) rehab loans and FHA renovation loans – are offered through regular lenders like banks, credit unions and online lenders.

Because the loans are backed by a government agency, lenders can approve borrowers with less-than-perfect credit for these loans.

The key difference between an FHA 203(k) loan and a regular FHA loan is that an FHA 203(k) loan is designed for home buyers who want to invest in a fixer-upper.

With an FHA 203(k) loan, you get the money you need to both buy the house and upgrade it in one lump sum.

The loan works like a regular mortgage. You borrow the money upfront and then you make regular monthly payments for the life of the loan. An FHA 203(k) loan is available in either 15- or 30-year terms and as a fixed-rate or an adjustable-rate mortgage.

What kind of home can I buy with an FHA 203(k) loan?

You can buy a fixer-upper (including foreclosed) home with an FHA 203(k) loan.

You can also take out an FHA 203(k) mortgage refinance and use it for improvements on your current home. It doesn’t even have to be major repairs. You can use an FHA 203(k) loan for cosmetic repairs and smaller upgrades on your home.

How much can I borrow?

You can borrow up to 110% of the property’s proposed future value or the home’s purchase price plus renovation costs, whichever is less.

However, your total loan amount can’t be more than your regional FHA loan limit. These vary by area, but the limits tend to be $356,362 for low-cost areas and $822,375 for high-cost areas.

Can I use an FHA 203(k) loan to build equity?

Yes! Let’s say you buy a fixer-upper in a neighborhood with stable or rising property values. When you upgrade the home, its value usually rises to be closer to the value of other homes in the neighborhood. The increase in value is also usually more than the cost of renovation. 

By buying an undervalued home and renovating it, you build equity quickly and position yourself to gain more in the future.

What Are the Requirements for an FHA 203(k) Loan? Laying a Foundation

FHA loans are designed to help first-time home buyers and buyers with lower incomes and credit scores become homeowners. That tends to make FHA loans easier to qualify for than most conventional mortgage loans. 

To qualify for an FHA 203(k) loan, you’ll need a minimum credit score of 580 (though 620 – 640 is preferred), a debt-to-income ratio of 43% or less and a minimum down payment of 3.5%.

You may also qualify with a credit score of 500 – 579 if you can make a 10% down payment.

What Types of FHA 203(k) Loans Are Available? Scope of Work

Depending on the scope of work and your budget for your home renovation or rehab project, there are two types of FHA 203(k) loans available.

  • Limited FHA 203(k) loan: Once known as the Streamlined 203(k), you use this loan for projects valued at less than $35,000. The limited FHA 203(k) has an easier application process, but you can’t use it for structural repairs.
  • Standard FHA 203(k) loan: You use this loan for projects that cost more than $35,000 and/or require structural repairs or improvements.

For both loans, you need to borrow a minimum of $5,000.

Do I Need Special Approval for an FHA 203(k) Loan? Plans and Permits

Yes. To get an FHA 203(k) loan, you’ll have to do more than promise that you’re going to use it for home improvements. During the loan approval process, the lender will want to know your plans for the money – in detail.

To track your progress, the lender will assign you an approved 203(k) consultant. These consultants, licensed by the Department of Housing and Urban Development (HUD), are sometimes referred to as HUD consultants.

Their job is to serve as your project manager, handle all the HUD-required paperwork, conduct assessments and inspections of the property and decide when to disburse money during the project.

Can I do the work myself?

As a rule, no. The FHA and your lender want assurances that the work is being done properly. So your lender will want you to work with a 203(k)-approved contractor. 

If you’re taking out a limited FHA 203(k) loan, you may be able to DIY it and do the work yourself. You’ll need to provide the lender with a letter detailing what you plan to do, your construction qualifications and how much time you estimate you’ll need to complete the project.

Be forewarned: Even with the best-laid plans, your lender may still say no to your DIY project.

How long do I have to renovate with an FHA 203(k) loan?

Not as long as you’d think. You see, FHA 203(k) loans have very specific time requirements.

When you apply for an FHA 203(k) loan, the contractor must certify that work will begin within 30 days of closing and be completed within 6 months.

If you have a limited FHA 203(k) loan (which doesn’t include structural repairs) the contractor may have to certify that you won’t need to live out of your home for more than 30 days during construction or renovation.

What can an FHA 203(k) loan cover?

A common misconception about FHA 203(k) loans is that they can only be used for major construction and structural renovations. In fact, an FHA 203(k) loan can cover many types of home repair and renovation projects, including: 

  • Foundations, walls and floors: Structural repairs and improvements 
  • Style and substance: Modernization and improvements to the home’s function and appearance
  • Safety: Elimination of health and safety hazards
  • Plumbing and septic systems: Upgrade existing pipes, water supply, sewage and septic systems 
  • Drainage: Repairs to roof, gutters and downspouts
  • Curb appeal: Landscaping and outdoor improvements
  • Accessibility: Enhancements for older adults and individuals with mobility and accessibility issues
  • Energy efficiency upgrades: Upgrade heating and cooling, add solar and install energy-efficient appliances
  • Conversion and reconfiguration: Convert a single-family home to a multifamily property (4 units max.) and vice versa

What can’t an FHA 203(k) loan cover?

There are limits to what an FHA 203(k) loan can do. Because the loan is designed to help people own their own home, it doesn’t include the following: 

  • Shared properties: Co-ops aren’t eligible because owners share ownership of the building. They don’t own individual units.
  • Furniture: Anything you buy with an FHA 203(k) loan needs to add to the value of the home for future residents. Furniture doesn’t count because you can take it with you when you move. 
  • Commercial properties: You can use an FHA 203(k) loan to improve a mixed-use property that has commercial and residential space. But you can only use the loan for the residential space.

An FHA 203(k) loan can’t be used for luxury additions like a swimming pool, tennis court, fire pit or satellite dish.

What Else Do I Need To Know? Nuts and Bolts

Do FHA 203(k) loans have closing costs?

Yes, they do. FHA 203(k) loan closing costs are similar to most mortgages: around 2% – 6% of the value of the loan. If you pay less than 20% down, you have to pay upfront mortgage insurance premiums (UFMIPs), which can equal 1.75% of the loan value.

If you don’t want to pay the UFMIP at closing, you can fold the premium into your loan. You’ll also have to pay monthly mortgage insurance premiums (MIPs).

Where can I find an FHA 203(k) lender?

It’s easy. HUD has a lender search page that lets you search your local area for mortgage companies that offer FHA 203(k) loans.

Which lenders do offer FHA 203(k) loans?

Lenders that offer FHA loans will most likely offer FHA 203(k) loans. This includes brick-and-mortar banks, credit unions and online lenders.

Can I flip a house with an FHA 203(k) loan?

Nope. These loans are intended for primary residences. You’ll need to wait at least 12 months before you’re allowed to sell.

Are there other renovation or rehab loans out there?

If you have good credit and don’t want to go through the process of getting an FHA 203(k) loan, there are other options.

The HomeStyle® Renovation mortgage from Fannie Mae and the CHOICERenovation® mortgages from Freddie Mac are two common conventional renovation loans.

Like FHA 203(k) loans, conventional loans allow you to borrow money for home renovations and rehab. You’ll still need to get approval from the lender for the renovations, but you’ll have greater flexibility and probably pay less in mortgage insurance.

Is an FHA 203(k) Loan Right for Me?

If you’re looking for a future home that is move-in ready, an FHA 203(k) loan probably isn’t the right choice for you. But if you’re willing to put in the time and effort to turn a fixer-upper into your future home, an FHA 203(k) loan can be a powerful tool.

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