How to Use 203k Loans

The Federal Housing Administration’s 203k loan program can help you buy and renovate a home at the same time.

By: Aly Yale

FHA 203k

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A 203k loan is a type of mortgage that can be used to finance both the purchase of a house and the home improvement costs that come with it. It’s ideal for buying a fixer-upper or making repairs on a home you already own. 

Because 203k loans are insured by the Federal Housing Administration (FHA), they tend to be easier to qualify for than other loan options. They also may offer lower interest rates than other financing products -- particularly personal loans and credit cards. 

What is an FHA 203k mortgage loan?

A 203k is a type of FHA mortgage that can help consumers buy and renovate properties with a single loan (and single monthly mortgage payment). These mortgage loans can also be used when refinancing. It's ideal for buying a fixer-upper or making repairs on a home you already own.

You may want to use a 203k loan if:

  • you’re interested in buying a house that needs significant renovation or modernization,
  • you’re purchasing a house and want to make it more move-in ready,
  • you want to move an existing home to a new location, or
  • your existing home needs repairs or renovation.

Standard 203k loans can offer as little as $5,000 toward home renovations expenses or up to 110% of the after-repair value of the home. The total value of the loan also must fall under FHA mortgage limits for the area.

How an FHA 203k loan works

The basic premise of an FHA 203k loan is this: You buy or refinance a home and roll your renovation costs into the loan balance. You then pay off those costs -- of both the home improvements and the property itself -- over time via a single monthly mortgage payment.

That’s the short version. The actual process for getting a 203k mortgage is a little more complex than that. Step by step, it looks something like this:

  1. You find a home you like that needs some work. Or you decide to make repairs to your current property.
  2. You apply with an FHA-approved mortgage lender. Keep in mind that not all FHA lenders offer 203k loans. You’ll also need an idea of what repairs and renovations you’ll be making and what they might cost.
  3. You find contractors. You’ll need to have licensed contractors draw up bids for all your projected repairs. These bids will go to you and your mortgage lender.
  4. Your lender will order an appraisal. This is to gauge both the current and after-repair value of the property. 
  5. Your lender underwrites your loan. You may need to provide additional documentation during this period. Your lender may ask for more details from your contractors, too. 
  6. Your loan is approved. You’ll sign your closing documents and get your keys.
  7. Your money goes to the seller and into escrow. The purchase proceeds go to the seller of the home while the funds designated for repairs and renovations are wired to an escrow account. 
  8. Your contractors get to work. The lender uses escrow funds to pay contractors as work is completed. The schedule for these payouts depends on the type of 203k you’ve applied for. 
  9. You move into the home. On Limited 203k loans, you have to live in the home within 60 days. Standard ones let you live outside the home until the renovation work is finalized.

What can a 203k loan pay for?

FHA 203k loans can help you pay for a wide variety of costs related to the purchase of your home and its renovation. They can even help you cover temporary housing expenses if you’ll be living off-site during your repairs.

Here’s what 203k loan funds can cover:

  • The initial purchase of the home.
  • Up to six months of temporary housing payments or rent.
  • Materials and labor associated with eligible home repairs.
  • Improvements in energy efficiency.
  • Site improvements and major landscaping.
  • Cosmetic upgrades and aesthetic changes.
  • Accessibility improvements.
  • Plumbing or electrical updates.
  • Addressing health and safety hazards.
  • Bringing a property up to code or complying with local ordinances.
  • Replacing appliances or modernizing systems.
  • Structural changes and additions.

Luxury upgrades, like a pool or hot tub, aren't eligible for 203k funding. Outdoor fireplaces, barbecue pits, and satellite dish installations are also not allowed.

What types of properties can you use a 203k loan for?

Unfortunately, 203k loans can’t be used to finance investment properties outright. To be eligible for a 203k mortgage, you’ll need to purchase a:

  • single-family home;
  • two-, three-, or four-unit property;
  • condo;
  • manufactured home built after 1978; or
  • mixed-use property with minimal commercial use.

The property must also be at least one year old and, if you’ll be using a Limited 203k, it needs to meet FHA standards for health and safety. Limited 203k loans require that you live on the property while renovations are being completed.

Like all FHA loans, 203k mortgages require the property to be your primary residence. If you’re looking to use a 203k loan to finance an investment or rental property, you’ll need to buy a multi-unit home and live in at least one of the units. You can also use a 203k mortgage to purchase a home and convert it into a multi-unit property.

Types of 203k loans

There are two types of 203k loan products you can choose from: the Limited 203k (previously called the Streamline 203k) and the Standard 203k.

As the names suggest, the Limited 203k is a smaller-scale loan that offers faster processing, less paperwork, and less in financing. The Standard 203k is designed for larger-scale projects and more expensive renovations.

Limited 203k FHA loans

The Limited 203k loan is for use on minor repairs and renovations and is limited to $35,000 in total funding. Limited 203ks are available as both fixed- and adjustable-rate loans and come in a variety of terms, including 3/1, 5/1, and 7/1 ARMs and 15-, 20-, 25-, and 30-year fixed loans.

Here are just a few of the eligible repairs you can make with a Limited 203k:

  • Repairing or replacing the roof, gutters or downspouts.
  • Repairing or replacing HVAC, heating, plumbing, or electrical systems.
  • Repairing or replacing flooring.
  • Minor remodeling.
  • Indoor or outdoor painting.
  • Replacing appliances.
  • Accessibility upgrades.
  • Abatement of lead-based paint.
  • Repairing or replacing decks, patios, and porches.
  • Waterproofing or finishing a basement.
  • Weatherization.

Limited 203k funds cannot be used for structural repairs, new construction, or remodeling that requires relocating a load-bearing wall. 

Here are some other Limited 203k loan program details you’ll want to note:

  • These loans come with less paperwork and oversight than Standard 203k loans.
  • There are no inspections required after the repairs are completed as long as your costs are $15,000 or less.
  • You must live in the home during renovations and move in within 60 days of closing on your loan.

Standard 203k FHA loans

Standard 203k loans allow for much larger amounts of cash as well as more major renovations and projects. However, the process is more complex than with Limited 203k loans and requires that you hire a HUD-approved consultant to guide the way. 

The minimum amount for a Standard 203k loan is $5,000, though you can borrow up to 110% of your home’s after-repair value as long as it’s below HUD limits for your area. Like Limited 203ks, these loans come in fixed- and adjustable-rate options with a variety of lengths and terms.

Some of the renovations you can cover with a Standard 203k include the following:

  • Plumbing, electrical, heating, and cooling improvements.
  • Structural changes.
  • Storm shelter additions.
  • Appliance and HVAC upgrades.
  • Roofing alterations.
  • Large landscaping and site improvements.
  • Sewage and septic improvements.
  • Site conversion (from a single unit to multi-unit property, for example).
  • Site relocation.
  • Accessibility upgrades.

You can also finance up to six months of rent or temporary housing payments, since you’ll be living off-site during the renovations. Here are some other Standard 203k details to keep in mind:

  • They require that you set aside “contingency reserves” equal to anywhere between 10% and 20% of your total repair estimates. This acts as a buffer if contractor estimates are inaccurate or the project changes over time.
  • You must hire a HUD-approved consultant. These loans come with more paperwork and oversight than Limited 203k loans.
  • You’ll need to have the property inspected after the repairs are completed.
  • You can’t live in the home during renovations, but can finance up to six months of rent or temporary housing payments.
Type of Loan Limited 203k Standard 203k
Loan limits Up to $35,000 Minimum: $5,000 Maximum: 110% of the after-repair value of the home, up to the FHA limits for your county
Property condition Must be habitable during renovations Does not need to be habitable during renovations
Eligible renovations Minor repairs and renovations, no structural repairs Any repairs, including major repairs, rehabilitation, and structural changes; health and safety issues, as well as building code violations, must be addressed first
Payments 50% up front, 50% after project has concluded Payments handled by a HUD consultant
Occupancy Must move in with 60 days Must move in within six months
Reserves No reserves required Requires 10% to 20% of the rehab costs be set aside in case of project changes
HUD involvement Does not require HUD consultant Requires HUD consultant
Other differences No third-party inspection required if repairs are less than $15,000 More paperwork, includes additional fees for architecture and engineering consulting, requires inspection

How much does a 203k loan cost?

Several costs come with getting a 203k mortgage loan.

First, as with any mortgage loan, there are closing costs. These are typically 2% to 5% of the total purchase price of the home. With 203k loans, there may be additional closing costs, including a supplemental origination fee, which usually clocks in around 1.5% of the loan amount. 

You’ll also have the following costs associated with a 203k loan:

  • HUD consultant fees: Between $400 and $1,000, depending on project cost.
  • Inspection fees: Up to $350.
  • Interest rates: Usually about 1% higher than traditional FHA loan rates.
  • Title update fees: $150.
  • Feasibility study: $100.
  • Mortgage insurance: 1.75% of the loan balance up front, plus an annual premium.

You may also have fees for building and city permits, surveys, septic certifications, and any necessary engineering and architecture consulting your project requires.

FHA 203k eligibility requirements

Because 203k loans are insured through the Federal Housing Administration, the loan program has less strict qualifying requirements than other mortgage loan options. The loan has one of the lowest credit score requirements of all loans as well as a minimal down payment.

FHA 203k qualifying factor Requirement
Credit score 500 (though it varies by lender)
Down payment 3.5% (with 580 credit score or higher) 10% (with credit score between 500 and 579)
Front-end debt-to-income ratio (projected housing costs only) 31%
Back-end debt-to-income ratio (current debts plus expected housing costs) 43%
Property One- to four-bedroom property or condo, some mixed-use properties, completed for at least one year
Purchase price Price plus estimated repair costs must fall under the FHA limit for the area

Keep in mind that your down payment will be a percentage of the total loan amount, including your repair costs. So if your home costs $200,000 and your repair costs are $40,000 ($240,000 total), you’d need at least $8,400 (3.5%) to qualify for a 203k loan.

Refinancing with a 203k loan

If you already own a home and want to repair, remodel, or renovate it, refinancing with a 203k loan might be a smart move. A nice benefit is that you can get a higher loan-to-value ratio (LTV) with a refinance than on a purchase loan.

The FHA allows for a 96.5% LTV on 203k purchase loans, but on 203k refinances, the LTV can go up to 97.5% -- offering even more funding for renovations and improvements. 

Here’s what else you should know about 203k refinancing:

  • You can use a 203k refinance even if you don’t have an FHA loan.
  • You don’t need to be in the home for a full year, as required for a purchase loan.
  • All other 203k rules and eligibility requirements apply.

With a 203k refinance, you can stay in your home and complete your renovations after closing on the loan.

Pros and cons of 203k loans

On the upside, 203k loans allow you to buy low-cost, low-competition properties you might not have otherwise considered. You can also customize the property to your exact needs, and once your repairs are done, you’ll enjoy instant equity in the home.

Another big advantage is that you can deduct the interest you pay to complete your renovations. Since interest on other financing products like personal loans and credit cards isn’t deductible, this can offer significant savings. 

There are downsides, of course. For one, 203k loans require mortgage insurance. That means an extra upfront fee and higher monthly costs for the life of the loan. They also have higher interest rates than traditional FHA mortgages. And, because they come with more red tape and paperwork (both for you and the lender), they also require a supplementary origination fee at closing.

In addition to this, 203k loans aren’t for use on investment properties. Unless you plan to live in one unit of a multi-unit building, renting out your 203k property just isn’t an option.

Finally, 203k loans typically take longer to close than other mortgages -- sometimes two to three times as long. This is due to contractor, appraisal, and approval requirements. This can be frustrating to sellers looking to close and move on quickly.

Advantages of 203k loans

  • You can finance both your home purchase and its renovations with a single loan.
  • They offer low down payments compared to other loan options (as little as 3.5%).
  • They can be used to refinance.
  • You may see lower home prices and less homebuying competition.
  • They’re available with fixed or adjustable interest rates.

Disadvantages of 203k loans

  • They require upfront and annual mortgage insurance.
  • They might have higher interest rates than typical FHA loans.
  • They require lots of paperwork.
  • They take longer to process and close.
  • They come with additional origination fees.
  • They may require an appraisal.
  • They can’t be used on investment properties (unless you plan to live there).
  • They’re only offered by certain lenders.

How to get an FHA 203k loan

If you’re considering a 203k loan for your home purchase or renovation project, the first step is to find a lender. Not all FHA-approved lenders offer 203k loans, so you’ll need to inquire specifically about the 203k before going any further. 

You should also contact several 203k lenders and get quotes from each. This will ensure you get the best possible rates and deals. Once you do this, take the following steps:

  1. Find the right property. Make sure the seller knows you’re using a 203k loan from the outset, as they can take longer than traditional mortgages to close.
  2. Fill out your lender’s application. You’ll need to provide financial documentation as well as information regarding your repairs during this process.
  3. Get a HUD-approved 203k consultant. This is required if you’ll be using a Standard 203k.
  4. Get quotes from licensed contractors. They'll also need to complete some 203k-related paperwork.
  5. Wait for the lender to appraise your home and underwrite your loan. They’ll move your renovation funds into an escrow account after closing.
  6. Schedule your contractors. They’ll be paid by your HUD consultant or at the beginning and end of your project (depending on which 203k program you’ve chosen.)

If you’re using a Standard 203k, you’ll also have an inspection once the improvements are complete. This will be coordinated by your HUD consultant. 

203k FAQ

What sort of interest rates can I expect on a 203k loan?

You’ll typically see a slightly higher rate on 203k loans than on other mortgages because of the extra work and paperwork required.

Because these loans are insured by the FHA, though, your rates might still be lower than other renovation financing options like home equity lines of credit (HELOCs), home equity loans, and personal loans. Be sure to compare quotes across products and lenders to get the best possible deal.

Do 203k loans require mortgage insurance?

All FHA loans, including 203k loans, require mortgage insurance. You’ll pay a 1.75% premium up front on closing day, plus an annual premium. The annual premium depends on your loan balance and is spread across your monthly payments. 

How do I find an approved 203k consultant?

You can use the Department of Housing and Urban Development’s online search tool. Just enter your city and state to see a list of HUD-approved 203k consultants.

How much can I qualify for?

To see your maximum 203k loan amount, use HUD’s online 203k calculator

Can I do any of the work myself?

If you’re a licensed contractor or have other significant experience in construction, you may be able to -- but you’ll have to prove your know-how to the lender. In most cases, lenders prefer that you use an outside, licensed contractor for any 203k repairs. This reduces risk and ensures your property is up to FHA standards.

How do I find contractors?

You can use any contractor in your area as long as they’re state-licensed, bonded, and insured. For your own benefit, it’s smart to make sure they have 203k experience, as these loans have very specific procedural and documentation requirements. 

Where can I get an FHA 203k loan?

You’ll have to use an FHA-approved lender. Not all of them offer 203k loans, though, so check out their websites or contact a loan officer to be sure. You can also use HUD’s lender tool (be sure to check the 203k box) to find one who’s completed at least one 203k project in the last year.

If I don’t use an FHA 203k loan, what other options do I have to finance my home improvements?

There are lots of options. If you’re a homeowner, a home equity loan, HELOC, or cash-out refinance could work. If you’re purchasing a new property, a Fannie Mae HomeStyle Loan is a good choice. You can also use a personal loan or a credit card.

A 203k loan is worth the time it takes

If you've got your eye on a fixer-upper or just need to make some repairs to your existing home, a 203k loan can be a smart option. 

Just make sure you understand the red tape that comes with it, and exercise patience as you go about the application process. This type of mortgage will likely take much longer than previous ones you've applied for (but it should be worth the wait).

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