An FHA 203 (k) loan allows you to buy or refinance a home that needs work and roll the renovation costs into the mortgage. You’ll get a loan that covers both the purchase or refinance price and the cost of upgrades, allowing you to pay for renovations over time as you pay off the mortgage.
FHA 203 (k) financing can be an affordable way to pay for home improvements and can expand your home buying options, especially in high cost areas. Because 203 (k) loans are insured by the Federal Housing Administration, they may offer more lenient qualifying terms than other home improvement loans.
Here’s what you need to know about FHA 203 (k) mortgages and how to use them to finance home improvements.
How does an FHA 203 (k) loan work?
There are two types of FHA 203 (k) loans: limited loans – sometimes referred to as “streamlined” – and standard loans. Each of these rehab loans also has a 203 (k) refinancing option for current owners.
“203 (k) loans have rules on how much you can borrow for renovations and what you can do with the money.“
Limited and Standard 203 (k) loans have different rules about how much you can borrow for renovations and what you can do with the money. Upgrades that the FHA considers luxury, such as a swimming pool or outdoor kitchen, are generally not eligible.
203 (k) limited loan: Provides up to $ 35,000 for renovations, but major structural repairs are not eligible.
203 (k) standard loan: Renovations must cost at least $ 5,000 and major structural repairs are eligible. Borrowers using a standard 203 (k) loan should hire a HUD consultant to oversee the renovation process.
203 (k) eligible projects
Among other things, FHA 203 (k) mortgages can be used for:
Improve the functionality or attractiveness of a home.
Eliminate health and safety risks.
Rehabilitate plumbing or sewer systems.
Install or repair the roof, gutters and downspouts.
Install or replace the flooring.
Improve the main aspects of landscaping.
Ensure accessibility for a disabled person.
Note: This is a checklist and does not include all projects that can be funded with 203 (k) loans.
Improvements paid for with a 203 (k) loan typically must be done by a licensed contractor and are subject to the approval of an FHA assessor and, in some cases, a HUD consultant.
Who qualifies for an FHA 203 (k)?
Although it has a very specific purpose, the 203 (k) loan is still an FHA mortgage at its core. It means he has more indulgence qualification requirements than a conventional mortgage and is subject to FHA loan limits.
Credit score: You will need a credit score of at least 500 to qualify for an FHA 203 (k) loan, although some lenders may have a higher minimum.
Advance payment: The minimum down payment for a 203 (k) loan is 3.5% if your credit score is 580 or higher. You will need to pay 10% if your credit score is between 500 and 579. Down payment assistance may be available through state house buying programsand monetary gifts from friends and family are also permitted.
Maximum loan amount: FHA loan limits vary depending on where you live, but are generally capped at $ 356,362 in low-cost counties and $ 822,375 in high-cost counties.
Foreclosure: In most cases, a foreclosure within the past three years will prevent you from qualifying for an FHA loan.
To apply for a 203 (k) loan, you will need to find an FHA approved lender and be prepared to provide your Social Security number, as well as documents that verify your income, debts, and credit score.
While FHA loans generally have closing costs than conventional mortgages, there may be additional set-up costs and higher appraisal fees.
Are FHA 203 (k) loans a good idea?
If you buy a upper fixer, or repairing a home you already own, the FHA 203 (k) mortgage may be a good option, but be sure to weigh the pros and cons against your unique financial needs.
the HomeStyle loan by Fannie Mae and the CHOICER renovation loan from Freddie Mac are two common conventional home improvement loans. They might be a better fit for those with higher credit scores or who want upgrades that the FHA considers “luxuries.”
Benefits of a 203k loan:
Has low down payment requirements and minimum credit score.
Offers a lower interest rate than credit cards or personal loans.
May cover mortgage payments if the home is uninhabitable during renovations.