FHA 203(k) Loans: What You Need To Know

The FHA 203(k) Loan is an easy to use mortgage program specifically designed for those who wish to make improvements on an owner-occupied home they own or would like to buy.

Rather than having to obtain a separate loan to finance the cost of repairs, the FHA 203(k) loan allows you to finance the rehab costs within the first mortgage!

The 203(k) loan program offers two versions that work best for different situations:

• The Standard 203(k) is perfect for updates and repairs, although there is a minimum repair cost of $5,000 and you have to work with a 203(k) loan consultant to complete the process.
• The Limited 203(k) is for modest upgrades and repairs. This loan does not require you to use a 203(k) consultant, but the maximum repair cost cannot exceed $35,000. There is no minimum repair amount for this type of 203(k) loan.

The main benefit is having the ability to finance the purchase price and the renovation costs all with one loan and with a great interest rate. The FHA 203(k) loan guidelines also allow for the funds to cover the costs of your temporary housing while the remodeling is being done.

Generally speaking, 203(k) loans can be used for projects that increase the value and/or safety of your home. The FHA lists the following eligible activities for loan funding on its website:

• Structural alterations and reconstruction activities.
• Improvements to a home’s function or utility.
• Improvements that improve health or eliminate safety hazards.
• Changes that improve a home’s appearance.
• Replacing or repairing plumbing, a well or a septic system.
• Replacing or repairing roofing, gutters or downspouts.
• Replacing or adding flooring.
• Major site improvements or landscaping projects.
• Improvements that make homes accessible for people with a disability.
• Energy-use improvements.

Property eligibility requirements

You may use a 203(k) loan to finance the rehabilitation of the following types of properties:

• Single-family to four-family dwellings.
• Existing construction that has been completed for at least one year.
• Teardowns, as long as part of the existing foundation will remain.
• An existing house that will be moved to a new foundation.
• The residential portion of a mixed-use (commercial/residential) property.
• FHA-approved condos.

Borrower eligibility requirements

The FHA 203k loan requirements are similar to that of a standard FHA loan. 

To qualify for a 203(k) loan, you must:

• Have a minimum credit score of 500.
• Your maximum debt-to-income ratio can only be 41% to 45%.
• You need a down payment of 3.5% or more.
• The loan amount (including both the purchase and renovation costs) must be lower than the maximum loan limit for your area.
• The home must be your primary residence and meet property eligibility requirements.

The biggest difference in qualifying for an FHA 203k mortgage rather than a traditional FHA mortgage is that you must qualify based on the costs of your renovation, in addition to the purchase price.

Pros and Cons of an FHA 203(k) Loan

Here are some pros and cons of an FHA 203(k) loan that may help you decide if it is right for you and your financial situation. 

Pros

• Credit scores down to 500 permitted.
• Low down payment of only 3.5%.
• Borrow more than the purchase amount to make necessary repairs.
• Borrow up to 6 months of mortgage payments while your home is being repaired.
• Available in both fixed and adjustable rates.

Cons

• Interest rates are higher than standard FHA rates.
• A lot of paperwork.
• The closing time is very long due to the paperwork and coordination required.