FHA 203(k) Loans

What Is an FHA 203(k) Loan?

An FHA 203(k) loan is a specialized home loan backed by the Federal Housing Administration that bundles home purchase or refinance with renovation costs into a single loan. This type of loan, also known as a “rehab loan” or “renovation loan,” allows you to buy or refinance a home and pay for renovations with one mortgage and one monthly payment. It’s specifically designed to help buyers purchase properties that need work or homeowners renovate their existing homes. 

The program addresses a common problem when buying fixer-uppers: lenders won’t approve loans for homes needing major repairs. Because the lender verifies repairs, they’re willing to approve financing on properties they wouldn’t otherwise consider. 

How Do FHA 203(k) Loans Work?

When applying for an FHA 203(k) rehab loan, borrowers submit renovation plans, including contractor bids and timelines, which the FHA 203(k) lender reviews. The home is appraised to determine both its current value and projected value after renovations. This “after improved” value becomes the basis for your loan amount, giving you more borrowing power than standard loans that only consider current value. 

Once approved, funds for the home purchase are disbursed at closing, while renovation money is held in escrow and released as work is completed. All renovation work must be finished within six months, with inspections throughout to ensure everything stays on track. 

While the process involves more paperwork than a standard mortgage, it offers the advantage of financing both property repairs with one loan. This means one closing, one set of fees, and one monthly payment. 

FHA 203(k) renovation loans also let you refinance for home improvements. Doing so means you wouldn’t have to consider other options, like an FHA cash-out refinance, if you want to borrow money to fix up your existing property. However, if the goal is simply to reduce your interest rate and make your monthly payments more affordable, you might benefit from an FHA streamline refinance instead. 

Types of FHA 203(k) Loans

Borrowers can choose from two types of FHA 203(k) rehab loans, each designed for different renovation needs: 

Standard 203(k) loan

The standard 203(k) loan is meant for major renovations or remodeling projects. This version allows for structural improvements, including room additions, and has no cap on repair costs other than FHA loan limits. The minimum amount that must be used for rehabilitation is $5,000. 

An FHA-approved 203(k) consultant must oversee the progress of the licensed contractor’s work from estimate to completion. This option is ideal if your property needs significant structural work or major systems replacements. 

Limited 203(k) loan

The limited 203(k) loan is for less extensive, non-structural repairs. Homeowners can finance up to $35,000 in addition to the purchase price or refinance amount for improvements and upgrades. 

This option is perfect for cosmetic updates like new flooring, paint, appliances, or minor remodeling projects. A 203(k) consultant isn’t required for limited loans, making the process somewhat simpler. 

What Can an FHA 203(k) Be Used for?

Borrowers can use FHA 203(k) loans for improvements of all kinds that make the home more functional, efficient, and appealing. Here are some eligible projects: 

• Structural repairs: Fix or replace foundations, walls, floors, or roofing to ensure the home is structurally sound. 
• Energy efficiency: Install new insulation, energy-efficient windows, solar panels, or upgraded HVAC systems to reduce utility costs. 
• Modernization: Update outdated kitchens and bathrooms with new fixtures, countertops, and appliances. 
• Health and safety: Remove lead-based paint, asbestos, or mold, and repair electrical plumbing or septic systems.
• Accessibility: Install ramps, wider doorways, or accessible bathrooms for disabled family members. 
• Exterior improvements: Replace siding, add or repair porches, fix gutters, update landscaping, or install a new driveway. 

It’s important to note that renovations considered extravagant or luxurious, like tennis courts, gazebos, and new swimming pools, are not covered under an FHA 203(k) loan. 

FHA 203(k) Loan Benefits

FHA 203(k) renovation loans offer several benefits that make them attractive to homebuyers and homeowners alike, such as: 

• Low down payment: You can get an FHA 203(k) loan with as little as 3.5% down.
• One loan simplicity: Avoid juggling multiple loans or using high-interest credit cards or personal loans for renovations by combining purchase and repair costs into one mortgage. 
• Build equity quickly: Fixer-uppers often come with less buyer competition, offering the opportunity to build significant equity through home improvements. 
• More lenient qualification: The requirements are typically more flexible than conventional mortgages, as the program is geared toward low to medium-income families. 
• Tax advantages: Potentially claim larger tax deductions by combining home purchase interest and renovation interest.  

FHA 203(k) Loan Requirements

Not every borrower or home qualifies for an FHA 203(k) renovation loan. To qualify, you’ll need to meet the same requirements as the FHA purchase loan, plus a few more specific requirements for the renovation aspect of the loan. These requirements include: 

• Primary residence: The main restriction is that you must be the owner-occupant of the home.
• Credit score: You’ll need a minimum score of 580 with a 3.5% down payment or 500-579 with a 10% down payment. 
• Debt-to-income ratio: Your DTI ratio can’t exceed 43 percent. 
• Loan limits: The total loan amount, including purchase price plus renovation costs, must fall within FHA loan limits for your area. 
• Renovation timeline: All repairs and renovations must be completed within six months of the purchase. 
• Contractor requirements: Most work must be completed by licensed contractors approved by the FHA 203(k) lender.
• Property eligibility: The home must be at least one year old and meet certain safety and livability standards determined through an FHA appraisal.

Fund Repairs With an FHA 203(k) Loan

Ready to turn a fixer-upper into your dream home? An FHA 203(k) loan can help make it happen. Whether you’re a first-time homebuyer looking to build equity or a current homeowner wanting to renovate, this program offers an affordable way to fund improvements. 

Griffin Funding specializes in helping clients throughout the 203(k) loan process. Our loan officers can guide you through every step, from application to final inspection. Check out the Griffin Gold app to learn more and compare your mortgage options, or reach out online today to get started!