FHA 203(k) loans are a type of home improvement loan backed by the Federal Housing Administration. They are designed to cover the cost of renovations and repairs - either on a newly purchased property or on the borrower’s existing home (via refinancing).
203(k) Guide Index
A 203(k) loan is a mortgage product insured by the Federal Housing Administration and designated for use on homes in need of repair or renovation. They can be used on a newly purchased house or a homeowner’s existing property, should they be interested in refinancing. Sometimes, 203(k) loans are also known as FHA construction loans or rehab loans.
There are several types of FHA 203(k) loans, and the right one depends on your overall goals. You can either use your 203(k) loan to cover both repairs and the purchase of a home, or you can simply use it to cover repairs costs on a property you already own. You may also be able to use your 203(k) to cover the cost of temporary housing while your home undergoes renovations.
Keep in mind, there are limitations to what repairs and renovations your 203(k) loan can cover. Though most structural repairs are eligible costs, things like pools, gazebos and other luxury upgrades cannot be paid for with a 203(k).
The Limited 203(k) (formerly the 203(k) Streamline) is designed for minor repairs and renovations. Costs are typically capped at $35,000. There is no minimum.
Limited 203(k) loans can be used to cover things like:
These loans don’t cover larger, structural renovation projects — like moving walls, adding rooms or changing the overall footprint of the property. It’s one of the most commonly offered 203(k) loans on the market.
The 203(k) standard loan is a more comprehensive rehab loan that covers just about any project, minus luxury amenities/upgrades. The 203(k) standard loan requires a minimum of $5,000 in improvements.
Standard 203(k) loans can cover:
Projects must be completed within six months in order to qualify for a 203(k) standard loan.
You don’t have to buy an entirely new property in order to use a 203(k) loan. If you already own a home and need to make repairs or renovations, then a 203(k) refinance can be a solid option to explore. Your repairs must cost $5,000 or more in order to qualify. Lenders will often have their own guidelines in addition to what the FHA requires.
FHA 203(k) loans are designed for individual home buyers (or condo/townhome buyers), as well as nonprofit organizations. Investors are not eligible for these products.
Here are some other requirements to keep in mind:
Lenders will often have their own guidelines in addition to what the FHA requires.
The FHA 203(k) loan process is slightly different than with other mortgage products, largely because it requires estimating project and repair costs before the loan can be finalized.
Here’s how the process generally works:
FHA 203(k) loans typically come with a bit more paperwork (and legwork) than other mortgage products, so the closing process is often much slower. There’s also paperwork that must be completed by your contractors, so it’s best to deal with someone who’s had 203(k) experience before.
FHA 203(k) mortgages typically come with competitive rates, though they may be slightly higher than other FHA products due to the higher risk of the property and the additional paperwork required.
Lenders may require additional fees with 203(k) loans, including:
203(k) loans also require a Mortgage Insurance Premium, which amounts to an up-front fee of 1.75 percent of the total loan amount, plus an annual amount depending on your specific scenario. Talk with a lender about all fees and rates that may be associated with your loan.
There are numerous pros and cons to using a 203(k) loan — as well as buying a home in need of repair. Here are some of the most important:
If you’re considering buying a home in need of repair (or your existing home needs a pick-me-up), a 203(k) loan isn’t your only option. Depending on your goals and budget, you can also consider one of the mortgage loans instead:
Personal loans are also an option, those these will likely come with higher interest rates than most mortgage products. The major benefit is that they don’t come with stipulations as to what you can repair, renovate or upgrade on the property.