FHA 203k Loan: A Comprehensive Guide

FHA 203(k) loans combine a mortgage and renovation loan with flexible requirements

If you’re looking to build equity quickly and don’t mind taking on a fixer-upper, an FHA 203(k) loan might be the ideal solution for you.

This unique loan program allows you to purchase a home and finance minor or major renovations, all under a single, affordable mortgage.

By opting for a fixer-upper, you often face less competition from other buyers, offering you the opportunity to build significant equity in a short period of time through a series of manageable home improvements. Ready to take the plunge? Here are your first steps.

In this article (Skip to...)

• FHA 203(k) loans
• Types of 203(k) loans
• Eligible renovations
• Refinancing
• Requirements
• Lenders
• Alternatives
• How to apply
• FAQ

What is an FHA 203(k) loan?

An FHA 203(k) loan allows you to buy or refinance a fixer-upper while financing the necessary repairs with a single loan and one monthly mortgage payment.

This type of mortgage, also known as a “rehab loan,” addresses a common issue when purchasing a fixer-upper home. Which is that lenders often won’t approve loans for homes in need of major repairs. But because the lender tracks and verifies repairs when using a 203(k) loan, it is willing to approve a loan on a home it wouldn’t otherwise consider.

That said, for a lender to approve 203(k) financing, the home must already meet certain safety and livability standards, which will be determined through an FHA home appraisal.

If the fixer-upper is too rundown, you won’t be able to use an FHA 203(k) rehab loan.

This loan program is ideal for budget-conscious borrowers and first-time home buyers interested in renovating a fixer-upper home rather than purchasing a costlier, move-in ready property.

How does the FHA 203(k) loan work?

Understanding how a 203(k) loan works is important for people who are thinking about getting one. This type of loan has its own steps and roles that make it different from other mortgage products. Here’s what you can expect.

Application process

Most 203(k) loan applications are more detailed than standard mortgage loan applications. Potential borrowers must have a credit score of at least 620, a debt-to-income ratio below 43%, and the intention to live in the home as a primary residence. After making sure they are eligible, applicants should look for a suitable property that needs repair or renovation.

Once a property is chosen, the borrower works on a detailed plan for fixing it up, including an estimate of how much it will cost. This plan is necessary for all 203(k) loan applications.

Next, applicants must find a 203(k)-approved lender, complete the lender’s application, and provide income proof, tax returns, and renovation plans. HUD-approved consultants perform feasibility studies and property appraisals for Full 203(k) loans. The lender approves the loan if it meets all criteria after a thorough review.

Contractors and consultants

Contractors and consultants play important roles in the 203(k) loan process. Contractors give detailed bids for the work to be done, carry out the plans that have been approved, and ask for payments as project milestones are met.

Moreover, a HUD-approved consultant is needed for a Full 203(k) loan. The consultant looks over the proposed plans for renovation, checks out the property, does a feasibility study, and keeps an eye on the project. They make sure the proposed renovations will cost what was estimated and will increase the property’s value. Before each stage of the job is paid for, the consultant also signs off when the work is done.

For a Streamline 203(k) loan, you don’t need a consultant, but you do need a reliable contractor who can finish the work to your satisfaction and within the budget.

Timelines and payment schedules

Once the 203(k) loan closes, work must start on the house within 30 days. For a Full 203(k) loan, the project is supervised by the consultant and the contractor, and the work must usually be done within six months.

Contractors are paid in parts, or “draws.” For big projects, the first draw comes after the loan closes, and the rest are given as each important stage of work is finished, according to the agreement. Before each payment, the consultant must check the work.

For Streamline 203(k) loans, the contractor can be paid twice: once as a down payment and once as a final payment after the work is done to satisfaction.

By knowing about these parts of a 203(k) loan, potential borrowers will be better able to get through the process and make sure that the renovations go as smoothly as possible.

Types of FHA 203(k) loans

There are two different 203(k) loan options: Standard 203(k) loans, also called Full 203(k) loans, and Limited 203(k) loans—also called Streamline 203(k) loans.

Both loan types are federally insured mortgages that can be used to purchase and improve a home. However, each loan option is tailored to a particular project type depending on the scope and cost of the planned renovations.

Standard FHA 203(k) Loans

Larger, more complicated projects are suited for the Standard or Full 203(k) loan. This applies to any project whose renovation costs are greater than $35,000, such as landscaping and structural work. Standard 203(k) loans can also be used to finance structural repairs as well as functional improvements to structures.

For example, if you are purchasing a home that will require a new roof, HVAC system, or structural foundation work, the Standard 203(k) loan may be a good option.

A Standard 203(k) loan requires an appraisal of the property to determine its value following renovations. It is also necessary to work with a 203(k) consultant who has HUD approval. The FHA-approved consultant will evaluate the proposed work, go over the contractor’s proposals, keep track of the project’s progress, and approve the distribution of loan proceeds.

Limited FHA 203(k) Loans

For non-structural renovations, there is a more straightforward version called the Limited, or Streamline 203(k) loan. These are small remodeling projects or updates that won’t cost more than $35,000. Borrowers can use a Limited 203(k) loan to make a range of renovations, including aesthetic changes like painting, updating flooring or appliances, or even making energy-efficient upgrades.

One significant distinction between the two loan types is that the Limited 203(k) does not permit structural changes. As a result, it is usually easier to obtain because there is less paperwork involved and you do not need to hire a 203(k) consultant. It is, however, critical to hire a reputable contractor who is familiar with the 203(k) loan process.

However, an FHA 203(k) loan requires a “buffer” equal to 15% of the total bids.

This buffer is known as a contingency. It is a reserve fund set aside in case your contractor incurs cost overruns. The contingency fund is credited back to you if it is not used. So, your “real” maximum repair costs can be around $31,000.

What can you do with an FHA 203(k) loan?

The repairs and projects that can be done depend on which type of FHA 203(k) loan option is chosen.

• Limited 203(k) loan: Ideal for homes needing minor repairs, this loan option caps renovation costs at $35,000 and has no minimum spend. The application process tends to be more straightforward due to the smaller loan amounts, but it’s not suitable for major structural repairs
• Standard 203(k) loan: Suited for extensive renovations exceeding $35,000, this loan type requires a minimum spend of $5,000 and mandates oversight from a HUD consultant. It complies with strict government guidelines and is ideal for major structural work

Keep in mind that the size of the proposed renovation will largely determine the type of 203(k) loan that is best for your needs.

The Standard 203(k) loan would be the best option for major structural repairs or extensive renovation projects. For simpler, non-structural improvements, the Limited 203(k) loan may be the best option.

So why choose the Limited 203(k) option? Because more lenders offer it than the Standard 203(k) loan. And it’s a much simpler approval process, too.

During the loan application process, the scope of work will be decided. It must be in line with the rules set by the Federal Housing Administration (FHA) to be legal and eligible. Which one you choose will depend on the types of repairs your fixer-upper needs.

What you can’t do with the 203(k) loan

While FHA 203(k) guidelines are fairly lenient, there are some things you cannot use the rehab funds for. For example:

• Minor landscaping
• Adding a luxury amenity like a tennis court, barbecue area, or swimming pool
• Projects that will take longer than six months

In these cases, other options might be a better fit, such as getting a home equity loan after purchase or other alternatives mentioned in the next section.

Refinancing with a 203(k) loan

The FHA 203(k) loan is typically used for home purchases, but it can also be used for refinancing. You may use this refinancing option if your improvements total at least $5,000.

Lenders will request an appraisal that includes both the “as-is” or current property value and the “improved value” following improvements.

Your maximum refinance loan amount (subject to FHA loan limits) is the lowest of these three calculations:

• The existing debt before rehab plus the estimated cost of improvements and allowable closing costs
• The as-is value plus rehab costs
• 110% of the after-improved value x 97.75%

If you have owned the property for less than one year, the lender must use the acquisition cost plus the documented rehabilitation costs for your maximum loan amount. You do not need to have an existing FHA loan to use an FHA 203(k) loan for refinancing.

FHA 203(k) loan requirements for 2024

A 203(k) loan is a subtype of the popular FHA loan, which is meant to help those who might not otherwise qualify for a home loan. The FHA 203(k) loan requirements are flexible, which makes qualifying easier than a typical renovation loan.

Credit score requirements

FHA allows credit scores as low as 580, although some lenders might require a score of 620–640 to qualify for a 203(k) loan. Still, that’s much lower than the 720 or higher you would probably need for a conventional construction loan.

Minimum down payment

FHA requires just a 3.5% down payment, based on the purchase price and total project cost. For example:

• Home price: $200,000
• Total project cost: $25,000
• Down payment: $7,875 (3.5% of $225,000)

You can receive 100% of your down payment requirement via a gift from family, an approved non-profit organization, or a down payment assistance program (DPA).

Income and debt requirements

Lenders will examine your debt-to-income ratio, too. This is a comparison of your gross monthly income and debt repayments. Typically, less than 43% of your income should go toward your proposed mortgage payment plus all other debts. That’s $430 in payments per $1,000 of pre-tax income.

For example, if your income is $5,000 per month, your future house payment plus auto loan payments, student loan payments, and credit card bills shouldn’t exceed $2,150 per month.

Maximum loan amount

Using an FHA 203(k), you can borrow up to 110% of the property’s proposed future value, or the home price plus renovation costs, whichever is less.

But keep in mind that your total loan amount can’t be higher than your region’s FHA loan limits, which is $ in most parts of the country.

Occupancy and citizenship requirements

You must plan to use the property you are buying as your primary residence. If you plan to fix and flip an investment property, the 203(k) loan isn’t for you.

Furthermore, all FHA loans are available to U.S. citizens and lawful permanent residents. Lenders will verify citizenship status at the time of application.

Where can I get an FHA 203(k) loan?

When you’re looking for an FHA 203(k) loan lender, be aware that not every mortgage company originates these loans.

Furthermore, not every loan officer or mortgage broker understands the process. You’ll want to make sure that you’re working with an FHA-approved lender that underwrites a lot of them.

The U.S. Department of Housing and Urban Development (HUD) has a helpful search page you can use to determine if the lender you want to use has done at least one 203(k) rehab loan in the last 12 months. You just type in the lender name at the top, scroll down, and check the box for the 203(k) rehabilitation mortgage insurance program.

FHA 203(k) loan: Pros and cons

Fixer-uppers in need of repair or updating can be had on the cheap, and the fixes may not be expensive at all. For instance, a house potentially worth $250,000 may sell for just $200,000 when it needs only $20,000 in repairs. That leaves $30,000 in potential equity for a buyer with the initiative to manage the fixes.

Still, this strategy isn’t right for everyone.

FHA 203(k) pros

• Gain instant equity
• Deal with less competition to buy a home
• Gain valuable experience remodeling a home

According to real estate data website Realtytrac, the median home price in a “distressed” sale was 42% lower than the price netted in non-distressed situations. That’s a big discount.

The problem comes, however, when the buyer goes to finance the home purchase. Most mortgage programs require homes to be in near-top shape before the loan is approved. That’s where the FHA 203(k) rehab loan comes in.

The Federal Housing Administration’s (FHA) 203(k) loan allows buyers to finance the home and up to $35,000 in repairs with one loan. It’s possible to have lower monthly payments and higher equity in your home the moment you move in, compared to your friends and neighbors.

FHA 203(k) cons

As you would expect, there are some pluses and minuses to the 203(k) loan program.

• Hire reputable contractors and be diligent about having them complete paperwork
• Lenders can require you to send a bid back to the contractor two or three times for missing information
• You will have to decide on the repairs upfront and if they are within your budget

In addition, the loan process will take more time than a standard loan. You are increasing paperwork requirements by two to three times compared to a standard home loan. Go into the process expecting and embracing that fact. Don’t think that you’ll be the exception that closes the loan in 15 days. Set realistic expectations with the seller.

Alternatives to an FHA 203(k) loan

There are several reasons the FHA 203(k) might not be your best option. You may need only a few thousand dollars for minor work, for example. Or your home renovation might be too luxurious or expensive for FHA guidelines. You may want to do the work yourself. Or you’d prefer a renovation loan that doesn’t require mortgage insurance for life.

Thankfully, there are other home improvement loans. One might be a better fit.

Home equity loan

Also called a “second mortgage,” a home equity loan lets you cash out some of your equity without refinancing. A home equity loan is usually a fixed-rate mortgage that has a higher interest rate but costs less to originate and doesn’t require mortgage insurance.

These are ideal for projects that require a large sum upfront. The catch is that you need some home equity before you improve the property because second mortgage lenders typically lend up to 90% of the as-is property value.

Home equity line of credit (HELOC) 

The home equity line of credit is a good option when you need flexibility and don’t need to borrow a lot at once. It usually has a variable interest rate, and you pay interest on the amounts you withdraw. You can repay and re-use it up to your loan limit. Setup costs are low to none. Like a home equity loan, you’ll need some existing equity to get a HELOC.

Fannie Mae’s HomeStyle mortgage 

The HomeStyle loan is a conventional loan that allows you to buy and rehab a home with just 5% down. Unlike an FHA loan, the private mortgage insurance on this loan type is not permanent. And if your credit is good, your monthly mortgage insurance cost should be cheaper than with the FHA 203(k).

Freddie Mac CHOICERenovation and CHOICEReno eXPress loan

Like the HomeStyle renovation loan, both of these conventional loan programs let you finance the cost of buying and fixing up your home up to the maximum conforming loan amounts. But the CHOICEReno eXPress loan makes it easier to qualify if the cost of your renovations is less than 10% or 15% of your home’s value, depending on where you live. Both Fannie Mae and Freddie Mac’s renovation programs allow for as little as a 3% down payment.

Cash-out refinance

Like a HELOC, or home equity loan, a cash-out refinance can tap into your existing home equity to finance home improvements. But rather than adding a second mortgage, the new loan would replace your existing mortgage and provide cash for renovations.

For more information and help deciding which type of loan to use, see six types of home improvement loans.

FHA 203(k) loans versus conventional home rehab loans

Conventional home rehabilitation loans and FHA 203(k) loans are both designed to help borrowers purchase and renovate homes. But they have distinct characteristics, requirements, and benefits.

Remember, when choosing between these loans, it’s all about what fits your situation best. Talk to a trusted mortgage professional and weigh the pros and cons. Because while buying a fixer upper can be a wild ride, being informed makes it all a bit smoother.

How to get an FHA 203(k) loan

Applying for a 203(k) loan is a multi-step process that involves a bit more paperwork and time than a standard loan application due to the additional requirements related to the renovation plans.

Here’s a detailed look at the steps involved:

1. Choose your home improvement projects 

The first step of an FHA 203(k) loan is deciding which home improvements or modernizations you want to do (see a list of qualifying repairs below). The lender will require any safety or health hazards to be addressed first, including repairs like mold, broken windows, derelict roofing, lead-based paint, and missing handrails.

From there, you choose which cosmetic improvements you want to take care of, such as updating appliances, adding granite countertops in the kitchen, or installing a new bathroom. These types of updates are all eligible uses for this remodel loan.

2. Determine your eligibility

Make sure you meet the eligibility criteria for a 203(k) loan. This typically includes having a credit score of at least 620 and a debt-to-income ratio of less than 43%. The property must also meet eligibility criteria: it must be a one- to four-unit dwelling that is at least one year old.

3. Find a suitable property and plan your renovations

Search for a property that you’d like to buy and renovate. Make a detailed plan of the improvements you wish to make, including cost estimates. For a Full 203(k) loan, your plan must involve at least $5,000 worth of renovations, while a Streamline 203(k) loan must not exceed $35,000 in renovation costs.

4. Choose your contractors

The next step is to find the right contractors. Qualifying contractors must be licensed and insured, and they typically have to be in full-time business. You can’t use buddies who do construction on the side, and you typically can’t do the work yourself unless you’re a contractor by profession.

The best results will come from experienced and professional remodeling firms that have done at least one 203(k) renovation in the past. Be aware that one contractor’s refusal to complete the required forms could delay your entire project. So you might even go so far as to write the 203(k) paperwork requirements into the contractor agreement.

5. Get your bids 

Once your contractor is on board with helping you complete your loan application, get official bids. Make sure the bids aren’t guesses. They must be completely accurate because the lender will submit final bids to the appraiser, who builds the value of the work into the future value of the property, upon which your loan is based.

Changing bid dollar amounts later could incur additional appraisal costs and trigger a re-approval with the lender. Again, make sure your contractor knows all this!

6. Choose a 203(k)-approved lender and provide documentation

Not every lender offers 203(k) loans, so it’s important to find a lender who is familiar with the specifics of the 203(k) loan process. You can find a list of approved lenders on the Department of Housing and Urban Development (HUD) website.

You will need to provide a range of documentation to support your application. This may include pay stubs, W-2s, tax returns, details about your debts, and a written proposal for your planned renovations.

7. Property appraisal and feasibility study

For a Full 203(k) loan, the lender will arrange for a HUD-approved consultant to visit the property. The consultant will perform a feasibility study and review your proposed improvements to ensure they increase the property’s value and meet HUD’s Minimum Property Standards and local code requirements. For a Streamline 203(k), a consultant isn’t needed, but the property will still need to be appraised.

8. Closing the loan

Once the loan is approved, you’ll proceed to closing, where you’ll sign all of the loan documents. The renovation funds from your loan will be put into an escrow account to be released as work is completed.

9. Overseeing renovation work

Renovation work must start within 30 days of closing your loan. For a Full 203(k) loan, you’ll work with your consultant to oversee progress.

Depending on the extent of the repairs, you may be able to move in at the same time. But for bigger projects, arrange to live somewhere else until work is complete. You can finance up to six months of mortgage payments into your loan amount to allow room in your budget to do so.

10. Move into your renovated home

The work is complete, and you’re the owner of a beautiful new home. You’ve built home equity early on, and you didn’t have to engage in a bidding war to buy your ideal home.Plus, you may be able to refinance out of the FHA loan and the mortgage insurance premium (MIP) that comes with it.

FAQ: FHA 203k loan

Where can I find an FHA 203(k) rehab loan?

It’s always wise to shop around and find the best lender. But with a 203(k) loan, you may not always want the lender with the lowest interest rate.

It’s often better to accept a higher interest rate if it’s coming from a lender with more 203(k) loan experience than the lender who’s offering a lower rate. This is a rare exception in mortgage shopping, in which the lowest rate may not be in your best interest.

In the world of 203(k) loans, contractor and lender experience is typically more of a consideration than cost. Click the link below to begin your search for the best FHA 203(k) loan lender for your financial needs.