What Is an FHA 203(k) Loan?
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An FHA 203(k) loan allows you to buy or refinance a home that needs work and roll the renovation costs into the mortgage. You'll get a loan that covers the purchase or refinance price and the cost of upgrades, letting you pay for the renovations over time as you pay down the mortgage.
FHA 203(k) financing can be an affordable way to pay for home improvements and may expand your homebuying options, especially in high-cost areas. Because 203(k) loans are insured by the Federal Housing Administration, they may offer more lenient qualification requirements than other renovation loans.
Here’s what you need to know about FHA 203(k) mortgages and how to use them to finance home improvements.
» MORE: Get an overview of FHA loans
How does an FHA 203(k) loan work?
There are two types of FHA 203(k) loans: the limited — sometimes referred to as “streamline” — and the standard.
Limited and standard 203(k) loans have different rules about how much you can borrow for renovations and what you can do with the money. Improvements the FHA deems luxuries, like a swimming pool or an outdoor kitchen, generally aren’t eligible for either one.
203(k) loan borrowers are also bound by FHA loan limits, which vary by location. The FHA determines the value of the property in two ways, accepting whichever number is lower. The first way is to add the cost of renovations to the original value of the property. For example, if the home was originally valued at $300,000 and the loan limit in your area is $498,257, the cost of renovations cannot exceed $198,257.
The other way that the FHA determines value is to multiply the new value of the home after renovations by 110%. This number cannot exceed the FHA loan limit.
You can search for your county’s loan limit on HUD.gov.
Limited FHA 203(k) loans
This kind of loan can be appropriate for a home that’s nearly move-in ready and needs only a moderate repair or upgrade. In general, you can borrow up to $35,000, which makes this loan a good fit for those looking to make cosmetic fixes or some repairs, including those recommended by the home inspector or FHA appraiser. In some cases, you can borrow up to $50,000 if the property is in a Qualified Opportunity Zone and is one of the first 15,000 mortgages secured in a calendar year.
You cannot use a limited 203(k) loan to make major structural changes. However, if the kitchen or appliances are outdated or you hate that '70s carpet, you can use a limited 203(k) loan to bring the property into the 21st century.
Standard FHA 203(k) loans
If you’re taking on a renovation project that involves major structural work, the standard FHA 203(k) loan is for you. It has a minimum required draw of at least $5,000. A standard 203(k) loan can even be used for a full demolition and reconstruction, so long as the original foundation stays in place.
Because larger projects have implications for the integrity of the house, borrowers must hire an FHA-approved consultant to oversee the renovations. These consultants must have backgrounds in fields such as engineering or architecture. The U.S. Department of Housing and Urban Development, or HUD, maintains a searchable database of 203(k) consultants.
203(k) eligible projects
Among other things, FHA 203(k) mortgages can be used to:
Improve a home’s functionality or attractiveness.
Eliminate health and safety hazards.
Rehab the plumbing or sewer systems.
Install or repair the roof, gutters and downspouts.
Install or replace the flooring.
Improve major aspects of the landscaping.
Ensure accessibility for a disabled person.
Make a home more energy-efficient.
Note: This is a summary list and does not include all projects that can be financed with 203(k) loans.
Improvements paid for with a 203(k) loan must generally be completed by a licensed contractor and are subject to approval by an FHA appraiser as well as oversight by the FHA-approved consultant if it’s the standard loan option.
It’s wise to start talking to contractors as soon as possible to ensure you can start the project soon after closing. Because a lot of specific paperwork and protocols go along with an FHA 203(k) renovation, you will want to find a contractor with experience working on this kind of project.
The renovation must begin within 30 days of closing and be completed within six months. If the home is going to be uninhabitable during this period, you can use part of the loan to pay for mortgage expenses.
Type of loan | Loan limit | Minimum draw | Types of eligible projects |
|---|---|---|---|
Limited FHA 203(k) loan | Usually $35,000. | None. | Minor repairs or cosmetic upgrades. Examples include carpet replacement, painting and the purchase of new appliances. |
Standard FHA 203(k) loan | The loan is subject to the FHA loan limits for the county. | $5,000. | Extensive repairs and renovations that require the oversight of an approved professional. Examples include roof replacement, plumbing work and enhancing accessibility for disabled residents. |
Refinancing with an FHA 203(k) loan
You can apply for a 203(k) loan even if you already own a home. In this case, the 203(k) loan will pay off the original mortgage, and the remaining balance will go into an escrow account that pays for the improvement projects.
Again, 203(k) loans are bound by FHA loan limits. This means that if you have a conventional loan that exceeds this limit in your area, you won’t be able to refinance it into an FHA 203(k).
This is less likely to be a concern in areas with a particularly high cost of living, such as San Francisco or the Washington, D.C., metro area, where the FHA loan limit matches the conforming loan limit at $1,149,825.
Who qualifies for an FHA 203(k)?
Although it has a specific purpose, the 203(k) loan is still an FHA mortgage at its core. This means it has more lenient qualification requirements than a conventional mortgage and is subject to FHA loan limits.
Credit score: You’ll need a credit score of at least 500 to qualify for an FHA 203(k) loan, though some lenders may have a higher minimum.
Down payment: The minimum down payment for a 203(k) loan is 3.5% if your credit score is 580 or higher. You’ll have to put down 10% if your credit score is from 500 to 579. Down payment assistance may be available through state home buyer programs, and monetary gifts from friends and family are permitted.
Max loan amount: FHA loan limits vary depending on where you live but are generally capped at $498,257 in low-cost counties and $1,149,825 in high-cost counties for single-family residences.
Foreclosure: In most cases, a foreclosure within the past three years will prevent you from qualifying for an FHA loan.
How do I get an FHA 203(k) loan?
To apply for a 203(k) loan, you’ll need to find an FHA-approved lender and be ready to provide your Social Security number as well as documents that verify your income, debts and credit score. When researching your options, consider your own profile and needs as a home buyer; some FHA 203(k) lenders are a better match for borrowers with lower credit scores, for example, while others may provide an exceptional experience for first-time home buyers.
Though FHA loans typically have lower closing costs than conventional mortgages, there may be additional origination fees and a higher appraisal fee.
Are FHA 203(k) loans a good idea?
If you’re buying a fixer-upper or fixing up a home you already own, the FHA 203(k) mortgage may be a good option, but be sure to weigh the pros and cons against your financial needs.
The HomeStyle loan from Fannie Mae and the CHOICERenovation loan from Freddie Mac are two common conventional renovation loans. They might be a better fit for those with higher credit scores or the desire for improvements the FHA considers luxuries. One of these loans may also be a better choice if the repairs are likely to put the value of the home over the FHA loan limit or if the six-month window seems too restrictive.
Pros of a 203(k) loan
Has low minimum down payment and credit score requirements.
Offers a lower interest rate than credit cards or personal loans.
Can cover mortgage payments if the home is uninhabitable during renovations.
Combines the costs of renovations and the mortgage into one loan.
Cons of a 203(k) loan
Requires FHA mortgage insurance.
Can’t be used for an investment property, unless the borrower lives in one of the units full time.
May require a HUD consultant and an experienced contractor.
Limits the kinds of projects that can be carried out.
