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FHA 203(k) Loans: A Complete Guide

February 14, 2024 6-minute read

Author: Scott Steinberg

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An FHA 203(k) loan – also known as a mortgage rehab loan, renovation loan, or Section 203(k) loan – can be used to fund both a home’s purchase and renovations under a single mortgage. In effect, it allows home buyers interested in buying a fixer-upper to roll the cost of both the property and these projects into one loan.

Current homeowners can also refinance the property with an FHA 203(k) loan and fund the costs of an upcoming renovation through a single mortgage. While Rocket Mortgage® doesn’t offer FHA 203(k) loans, let’s find out more about how one of these loans can help you buy and renovate your dream home.

What Is An FHA 203(k) Rehab Loan?

An FHA 203(k) loan is a form of home financing or refinancing that allows home buyers and homeowners to combine both mortgage and home renovation costs into a single loan. If the house you want to purchase or refinance requires significant repairs and rehabilitation efforts, an FHA 203(k) loan could be a good choice for you.

How Does An FHA 203(k) Loan Work?

An FHA 203(k) loan is backed by the Federal Housing Administration (FHA). This type of FHA loan provides a way for home buyers or homeowners to borrow sufficient funds to address the cost of any given property along with subsequent repairs.

Funds obtained through an FHA 203(k) loan – which can take the form of a 15- or 30-year fixed-rate or adjustable-rate mortgage (ARM) – can be applied to both material and labor costs. Because these mortgages are insured by the government, 203(k) loans may come with more flexible borrower requirements than conventional loans.

The closing costs for FHA 203(k) loans are similar to those for alternate types of loans and refinances. Closing costs typically include a home appraisal fee, inspection fee, loan origination fee, title search and homeowners insurance. Select lenders may apply additional fees for extending these loan packages, though.

Keep in mind that work covered under an FHA 203(k) loan must start within 30 days of closing. Projects must be completed within a maximum of 6 months’ time as well.

An FHA 203(k) loan makes it possible to purchase or refinance a home that needs significant care and improvement. The expenses associated with these efforts are added to the total loan amount you’re qualified to borrow. The loan is then paid off over a period of years as you make your monthly mortgage payments.

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Types Of FHA 203(k) Loans

The two types of FHA 203(k) rehabilitation loans are streamline and standard loans. We’ll explore both of these mortgage loan options below. 

Streamline FHA 203(k) Loan

A streamline 203(k) loan, or limited loan, is frequently used for homes that require fewer repairs. It allows home buyers or homeowners to borrow up to $35,000 to cover the cost of renovations. No minimum cost requirement is attached, and applications may be simpler to process due to the lower sum borrowed under the terms of this loan. Bear in mind that you won’t be able to roll major structural repairs into the sum you wish to borrow.

Standard FHA 203(k) Loan

On the flip side, a standard 203(k) loan can be used to cover major structural repairs, or for projects that exceed $35,000. Renovations must cost a minimum of $5,000, though, and you must hire a consultant from the U.S. Department of Housing and Urban Development (HUD) to oversee the renovation process. You must also follow select rules and guidelines to ensure compliance with government regulations.

What Can An FHA 203(k) Loan Be Used For?

An FHA 203(k) loan can be used to fund a variety of home projects, including, but not limited to:

  • Improving a home’s curb appeal
  • Installing or repairing roofing and flooring
  • Making a home more energy-efficient
  • Fixing health or safety hazards
  • Enhancing a home’s accessibility or functionality
  • Overhauling plumbing and septic systems
  • Redoing landscaping and groundwork
  • Repairing or renovating gutters and downspouts
  • Making changes that improve or modernize a home’s appearance

Note that luxuries such as a swimming pool, hot tub, outdoor fireplace, satellite dish and barbeque pit aren’t deemed eligible expenses by the FHA under the terms of a 203(k) loan. As a general rule, any upgrade or enhancement that doesn’t improve the actual functioning or attractiveness of the property won’t be covered under an FHA 203(k) loan.

Certain types of properties may also be prohibited from application. These include mixed-use properties (which combine residential and commercial space) and co-ops. Be sure to do your research before applying for an FHA 203(k) loan.

FHA 203(k) Loan Requirements

As with any personal loan or mortgage, borrowers must meet certain minimum requirements to qualify for an FHA 203(k) loan. These requirements are similar to standard FHA loan requirements. Among them, you’ll find that:

  • Lenders require applicants to have a credit score of at least 500 and a maximum debt-to-income ratio (DTI) of 43%.
  • FHA loan borrowers have to pay an upfront mortgage insurance premium (MIP) that’s equal to 1.75% of the FHA loan.
  • An FHA 203(k) loan requires a minimum down payment of 3.5% for those who possess a credit score of 580 or above. The minimum is 10% for those with a lower score (in the 500 to 579 range).
  • A 203(k) loan can only be used if the property is the borrower’s primary residence.
  • FHA loan limits only let you borrow a maximum of $472,030 (low-cost areas) or $1,089,300 (high-cost areas) for single-family properties.
  • Repairs and renovations must be performed by a licensed contractor, not the borrower.

To apply for an FHA 203(k) loan, you’ll also need to work with an FHA-approved lender. Be prepared to provide your lender with documentation verifying your identity, income, debts and credit score.

Using An FHA 203(k) Loan To Refinance Your Home

FHA 203(k) loans aren’t just for prospective home buyers. They can also be obtained by current property owners hoping to rehabilitate a piece of real estate that they hold within their portfolio. You’ll find that the actual mechanics of refinancing a current mortgage into a 203(k) loan are similar to those associated with a typical refinance, but they may come with additional requirements attached.

If you’re looking to refinance with an FHA 203(k) loan, a portion of the money you borrow will go toward paying off the outstanding balance on your existing mortgage. Any remaining funds will be held in an escrow account until repairs are complete. Then, the funds will help pay off the cost of your home renovations.

If you already took out an FHA 203(k) mortgage to finance your home purchase, you can refinance it under the terms of the FHA streamline program as well. Doing so may help you obtain a lower interest rate that leads to lower monthly payments.

Pros And Cons Of 203(k) Rehab Loans

Like all types of mortgages, FHA 203(k) loans come with their fair share of pros and cons. It’s important to do your homework before deciding whether an FHA 203(k) loan is right for you. Discover the pros and cons of FHA 203(k) loans below.

Pros Of FHA 203(k) Loans

  • A relatively low credit score and down payment requirement
  • The ability to provide temporary housing while a home is being repaired
  • An interest rate that may be low compared to other home improvement loans
  • The opportunity to combine home purchase and renovations into single loan

Cons Of FHA 203(k) Loans

  • The upfront mortgage insurance premium (MIP)
  • A requirement that the property must be considered a primary residence
  • The inability to be used for investment properties
  • The potential need to hire and work with a HUD consultant

Conventional Home Rehab Loans Vs. FHA 203(k) Loans

Qualified borrowers may also be able to finance both a home purchase and the cost of home improvements with a conventional rehabilitation loan. Compared to FHA 203(k) loans, conventional home loans have more stringent credit score and down payment requirements. However, conventional rehab loans allow borrowers to implement more “luxurious” renovations and updates than the FHA would otherwise approve.

You’ll want to research potential lending options, shop around and compare interest rates and loan terms before committing to an offer from any lender. Doing some basic financial groundwork will help you find the right loan program to finance the purchase of your house as well as any home improvements.

The Bottom Line: An FHA 203(k) Loan Could Be Right For You

Whether you’re looking for an affordable way to purchase, remodel or refinance your home, an FHA 203(k) loan can be an excellent option. Before moving forward with the application process, take the time to compare mortgage lenders, research FHA project rules and terms, and consider whether this financing vehicle makes sense for your fixer-upper.

While Rocket Mortgage doesn’t offer FHA 203(k) loans, we can help you get started with the home buying or refinancing process. Start the approval process and see what you qualify for today. 

Apply for a conventional mortgage now.

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Scott Steinberg

Hailed as The Master of Innovation by Fortune magazine, and World’s Leading Business Strategist, award-winning professional speaker Scott Steinberg is among today’s best-known trends experts and futurists. A strategic adviser to four-star generals and a who’s-who of Fortune 500s, he’s the bestselling author of 14 books including Make Change Work for You and FAST >> FORWARD. The CEO of BIZDEV: The Intl. Association for Business Development and Strategic Planning™, his website is www.AKeynoteSpeaker.com.