Everything You Need to Know About 203k Loans

When you’re in the market to buy a house, not only do you have to figure out what style, budget, and age of house you want, you have to decide if you want a move-in ready home or you’re willing to purchase a fixer-upper. Once you know that, it’s onto figuring out is you need financing to buy. For that there’s conventional loans, FHA loans, fixed-rate loans, VA loans, adjustable-rate mortgages, and more.

But these home mortgage programs won’t work if you’re buying a serious fixer-upper property. Good condition or not, if you want to do any home renovations for any reason, you’ll need to reserve enough funds in your budget to cover those costs.

Unless you opt for an FHA 203(k) loan.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

FHA 203(k) Loans

Buying fixer-uppers comes with their fair share of challenges. Financing is one of them. For older homes that requires major renovations, it may be necessary to secure a loan for the house and a separate loan for home improvements. You’ll be making two payments, probably with two different interest rates, for the same reason.

This is where the FHA Section 203(k) shines. Also known as the Renovation Mortgage, the loan covers the cost of the house AND the estimated cost of renovations. Because the government ensures FHA loans, the qualifications tend to be more lenient as well. That’s how FHA 203(k) loans are an excellent way to buy a home in high-cost areas where a new move-in ready home is out of reach.

Standard 203(k) loans can be used for major and extensive renovations like:

• getting rid of safety or health hazards
• structural changes, landscape work
• improving ADA accessibility
• energy conservation improvements
• new plumbing
• new or re-wiring

Even a house that has been demolished, as long as the foundation is structurally sound, can qualify for a 203(k) mortgage.

203(k) Requirements

FHA 203(k) loans carry the same requirements as other FHA loans. Depending on the lender, FHA loans required a credit score of 580 as of 2023 to benefit from the low down payment benefit.

The cost of renovations must be at least $5,000, and the loan amount (total purchase and renovation costs) must be below the loan limit for the area. If you’re not sure what the loan limit is for your area, you can check the FHA mortgage limit calculator. In 2023, the loan limit in low-cost counties was set at $472,030 while high-cost counties were up to $1,089,300.

FHA loans must be used for a primary residence and cannot be secured for investment properties. While it is possible to secure a 203(k) loan to refinance a home, it must be the primary residence of the borrower.

These loans are only available through FHA-approved lenders.

If approved, the renovation work must begin with 30 days of closing on the home. All renovations must be finished with six months.

Pros

• Saves you from applying for a mortgage loan and a separate renovation loan
• Fixed- or adjustable-rate loan available
• Saves time and money for borrowers with only one loan
• Provides government-backed insurance for lenders before the property provides enough security in its value
• Regular home improvement loans tend to have high interest and sort repayment terms, so the 203(k) loan fills a needed gap in the loan market

Cons

• Can only be used for primary residence
• Home must be at least a year old
• FHA loans require mortgage insurance for the life of the loan
• More mandatory paperwork and documentation than a conventional loan
• Depending on the work required, may need to have an HUD consultant and certified contractor oversee the home renovation

Limited 203(k)

For less extensive repairs (generally defined as the home being habitable throughout the duration of the renovation), there is a separate option called a Limited 203(k). Limited 203(k)s allow borrowers to finance up to $35,000 into the mortgage to make improvements or repairs to their homes. Existing homeowners can also use a Limited 203(k) to prepare their home for sale by making modern kitchen upgrades or other improvements. Like the regular 203(k), Limited 203(k)’s are for single-family, primary residences.

An FHA 203(k) loan might be a good option f you’re looking at fixer-uppers that need major repairs. No matter what loan you end up choosing to finance a home purchase, always do your research beforehand to ensure the loan is appropriate for your situation.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

Updated October 2023