FHA 203(k) Renovation Loan

If you're looking to buy a fixer-upper or make some serious renovations to your current home, an FHA 203k loan might be just what you need. Guaranteed by the Department of Housing and Urban Development (HUD), these loans, most often referred to as 203(k) rehab or renovation loans, allow you to purchase a home and roll the costs of repairing it into one convenient mortgage.

And it’s not just for buying—FHA 203k loans can also be used to refinance your existing home too. Whether you’re upgrading your dream home or breathing new life into a property, an FHA 203k loan could be the perfect solution.

FHA 203(k) Loan Requirements

As with any mortgage loan, there are specific requirements to meet before using an FHA 203(k) loan. Some focus on your financial situation as the borrower, while others apply to the property itself.

FHA 203(k) qualifications also differ depending on which loan type you choose.

FHA 203(k) Limited vs. Standard

There are two different types of FHA 203(k) loans: Standard 203(k)s and Limited 203(k)s.

Standard 203(k) loans are for major structural repairs and other large-scale projects that cost $5,000 or more. These loans require you to work with a HUD 203(k) consultant — a professional who oversees your renovations and ensures they’re done to HUD standards.

Limited 203(k) loans are for smaller, lower-cost projects up to $35,000. You can’t complete major structural repairs with these, but they do not require a 203(k) consultant involved in the process.

Whether you decide on a Standard or Limited 203(k), the home price and the renovations you’re financing (combined) cannot exceed the FHA loan limits for that year. In 2024, the limit on single-family properties is $498,257 in most parts of the country.

Eligible Property Types

FHA 203(k) loans are only for primary residences, so you can’t use one for a vacation home or investment property.

The property also must be one of the following:

• A single-family home
• A two-, three-, or four-unit home (and you live in one unit)
• A manufactured home (as long as the renovation doesn’t affect structural components)
• A mixed-use property where 51% of it is for residential purposes
• An FHA-approved condominium

Financial Requirements

Before diving into a renovation project with an FHA 203(k) loan, it's important to understand the financial requirements you'll need to meet. With all FHA loans — 203(k) loans included — borrowers need to have at least a 500 credit score (with a 10% down payment) or 580 (with a 3.5% down payment) to qualify. Some lenders require higher credit scores, so be sure to shop around if your credit score is on the lower end.

You also need to have a debt-to-income ratio of 43% or less in most cases — meaning your monthly debt payments take up 43% or less of your monthly income. Sometimes, lenders allow for DTIs of up to 50% if you have lots in savings or other compensating factors.

The FHA 203(k) Loan Process

Outside of the typical requirements needed to qualify for an FHA loan, there are several more steps required for a 203(k). Each part of the process makes sure that your renovation project stays on track and that your home meets FHA standards.

1. Find a suitable property
2. Find an FHA-approved lender
3. Consult local contractors for detailed estimates
4. Apply for a Standard or Limited 203(k)
5. Home appraisal and inspection
6. Create a renovation plan
7. Close on your loan
8. Complete renovations by the due date
9. Final inspection & completion

You must first find a lender to get a 203(k) loan. Not all lenders are authorized to issue FHA loans — and even fewer offer FHA 203(k) loans — so you may need to shop around a bit. You can use HUD’s search tool to find a lender that has issued 203(k) loans last year. A local mortgage broker may also be able to help you find a lender that offers these in your area.

You also need to find a local contractor who can give you a bid for your planned renovations and repairs for the property. You submit these bids along with your official loan application, and your appraiser uses them to determine the final value of your property, which is the basis for your eventual loan amount.

If you’re doing a standard 203(k), your lender assigns a 203(k) consultant to review the property and proposed renovation before you can close on your loan.

After your loan application has been approved, you will have the home evaluated by an FHA appraiser. The appraisal differs a bit from a typical FHA appraisal because it evaluates the home’s "after-improved" value—the estimated value of the property after the planned renovations are completed.

In addition to determining the after-improvement value, the FHA appraiser will ensure the home meets the minimum property standards set by the FHA. If the property does not meet these standards, those issues will need to be addressed in your renovation plan.

Generally, renovations must be completed within 6 months (180 days) from the date the loan is finalized (after closing). If the work is delayed, you may be able to request an extension, but this depends on the lender and specific circumstances. It's best to plan your project and contractor schedules carefully to avoid any potential issues.

After the loan closes, work on the home needs to begin within 30 days. During the renovations, your 203(k) consultant approves the release of funds as certain milestones are completed on your project. These go directly toward your contractor or other service providers.

Once all renovations have been completed, a final inspection is required for a Standard 203(k) loan. A HUD-approved inspector will verify that all renovations were completed according to the approved plans and meet FHA standards. For a Limited 203(k) loan, an inspection may not always be required, depending on the scope of the work.

If there were any unused renovation funds, they may be applied to the loan principal to reduce your balance. Alternatively, you may negotiate with the lender on how those funds are handled, but they cannot be pocketed as cash.

Once all payments have been made and the renovations are complete, the loan transitions into a standard FHA mortgage, and you’ll begin making regular mortgage payments on the final loan amount.

Disadvantages of the FHA 203(k) Loan

A 203(k) loan can be a great option if you’re eyeing a fixer-upper or home needing repairs. It’s not perfect, though, and there are limitations to how you can use them.

For example, you can’t use 203(k) loans to add what HUD considers “luxuries” — such as swimming pools, hot tubs, tennis courts, outdoor kitchens, etc. The renovations need to improve the function or value of the property to qualify.

There are also strict loan limits you can’t exceed, which can be particularly hard for buyers purchasing in expensive areas. The FHA 203(k) loan process is also more complicated than standard mortgage loans due to the additional requirements like renovation estimates, contractor management, and multiple inspections so it can also be challenging to find lenders that offer these mortgages. Neighbors Bank currently does not offer 203(k) loans.

FHA 203(k) Renovation Loan Alternatives

FHA 203(k) loans aren’t your only option if you’re buying a house that needs work. You can also use one of the following loan programs.

Fannie Mae HomeStyle and Freddie Mac CHOICERenovation

Fannie Mae and Freddie Mac both sponsor loan programs that can finance a home purchase and repair costs in one fell swoop. Freddie even offers an “express” version of its loan, which boasts a simplified process as long as the renovations cost less than 15% of your home’s value.

VA Renovation Loan

If you’re a Veteran or military member (or your spouse is), you can use the Department of Veterans Affairs VA renovation loan program. This loan type requires no down payment and allows you to finance both repairs and the purchase price using one loan.

USDA Renovation Loan

If you’re buying a home in a rural area, a USDA renovation loan could be an option. These loans also require no upfront down payment.

Home Equity Options

Home equity loans and home equity lines of credit (HELOCs) can also help. These are second mortgages (meaning a second loan in addition to your primary mortgage), but you can use them for any purpose — including repairing your home. You might even get a tax write-off for doing so.