The 411 on the FHA’s 203(k) Loan Program
As the inventory of homes for sale tightens, you can find yourself looking at properties in your price range that do not meet your criteria or fighting the urge to step up into a higher price range in hopes of finding the perfect home. Meanwhile, you may have noticed that there are homes languishing on the market that seem well-priced but are in serious need of updating.
These “ugly ducklings” might warrant a closer look. In many cases, a little renovation could get you exactly what you are looking for—even your favorite shade of flooring. Better yet, there are special loans available that can help you make it happen.
The Essentials of the 203(k) Loan
The FHA 203(k) loan goes by various names: the renovation loan, the rehab loan, the home improvement loan, all of which describe its purpose. The FHA 203(k) helps you pay to bring an older home in need of some TLC back up to market standards. Backed by the Federal Housing Administration (FHA) and funded only by 203(k) mortgage lenders, the loan combines a purchase mortgage with an additional amount to cover repairs and renovations.
These loans are only available for owner-occupied homes—not investment properties—and can carry higher rates than a Conventional mortgage. However, they do offer low down payments of 3.5% and the accommodation of credit scores starting at 580, though some lenders may seek 620-640.
Distinguishing Between Loan Types
The 203(k) program is divided into two distinct categories:
Limited 203(k) Mortgage: The Limited 203(k) Mortgage allows homebuyers and homeowners to finance up to $35,000 into their mortgage for home repairs, improvements, or upgrades. It's designed for non-structural work that a home inspector or an FHA appraiser might identify.
Standard 203(k) Mortgage: The Standard 203(k) program focuses on the rehabilitation and repair of single-family properties and can be used for structural repairs and larger projects that the Limited 203(k) does not cover.
Under the Standard 203(k), borrowers can undertake various projects, including structural modifications and landscaping. In contrast, the Limited 203(k) focuses on enhancements such as kitchen and bathroom remodels, appliance upgrades, and energy efficiency improvements.
Closing on a Standard Loan will take a little longer since you will need to provide project estimates to your Loan Officer for approval, since these loans will not cover DIY repairs. As with other FHA loans, you will pay a monthly mortgage insurance premium.
Refinancing for Renovation
While 203(k) loans are often associated with a new home purchase, homeowners who aren’t finding what they want on the market and who would like to make adjustments to their current homes can refinance from their current mortgage—whether it is an FHA mortgage or not—and into a 203(k) loan.
Pursuing this option provides cash for renovations and, in some cases, may provide a more attractive source of funding than a Home Equity Line of Credit, home equity loan, or a personal loan would.
Ultimately, this approach will take more time and planning since your lender will be tracking and verifying every change and repair you make. However, the end result will be a house that has everything you want in a home, literally. You also will have created some added home equity while you were at it.
What an FHA 203(k) Loan Can Do for You:
Streamlined (Limited) 203(k):
- Excludes structural changes
- Remodel bathrooms and kitchens
- Replace appliances and heating/cooling elements
- Update carpet and flooring
- Replace the roof, gutters, and downspouts
- Paint interior/exterior
- Address safety and health issues (e.g., mold, lead paint)
- Improve accessibility for people with disabilities
- Make energy-efficient improvements
Standard 203(k):
- Includes everything under the Streamlined version
- Allows structural changes
- Waterproof the basement
- Repair, replace, or add outdoor decks and patios
- Replace windows and doors
- Relocate walls
- Add a room
- Make structural repairs
- Convert a multi-family home into a single-family home (or vice versa)
- Landscape the property
- Connect to a sewer or water system