What Is an FHA 203(k) Loan?

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 $524,225, the cost of renovations cannot exceed $224,225.

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.

» MORE: Best lenders for FHA 203(k) loans

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 $75,000, 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.

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 However, if the kitchen or appliances are outdated or you hate that '70s carpet, you can use a limited 203(k) loan to bring the property into the 21st century.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.