FHA 203(k) Loans: What They Are And How They Work Bankrate Caret RightMain Menu Mortgage Mortgages Financing a home purchase Refinancing your existing loan Finding the right lender Additional Resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Bank Banking Compare Accounts Use calculators Get advice Bank reviews Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Credit Card Credit cards Compare by category Compare by credit needed Compare by issuer Get advice Looking for the perfect credit card? Narrow your search with CardMatch Caret RightMain Menu Loan Loans Personal Loans Student Loans Auto Loans Loan calculators Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Invest Investing Best of Brokerages and robo-advisors Learn the basics Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Home Equity Home equity Get the best rates Lender reviews Use calculators Knowledge base Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Loan Home Improvement Real estate Selling a home Buying a home Finding the right agent Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Insurance Insurance Car insurance Homeowners insurance Other insurance Company reviews Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Retirement Retirement Retirement plans & accounts Learn the basics Retirement calculators Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Advertiser Disclosure

Advertiser Disclosure

We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free - so that you can make financial decisions with confidence.
Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover.

How We Make Money

The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you. SHARE:

On This Page

WoodenDinosaur/Getty Images April 22, 2022 Checkmark Bankrate logo How is this page expert verified? At Bankrate, we take the accuracy of our content seriously. "Expert verified" means that our Financial Review Board thoroughly evaluated the article for accuracy and clarity. The Review Board comprises a panel of financial experts whose objective is to ensure that our content is always objective and balanced. Their reviews hold us accountable for publishing high-quality and trustworthy content. Libby Wells covers banking and deposit products. She has more than 30 years’ experience as a writer and editor for newspapers, magazines and online publications. Suzanne De Vita is the mortgage editor for Bankrate, focusing on mortgage and real estate topics for homebuyers, homeowners, investors and renters. John Stearns, CMC, CRMS is a Senior Mortgage Loan Originator with American Fidelity Mortgage. Bankrate logo

The Bankrate promise

At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict editorial integrity, this post may contain references to products from our partners. Here's an explanation for how we make money. Bankrate logo

The Bankrate promise

Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our mortgage reporters and editors focus on the points consumers care about most — the latest rates, the best lenders, navigating the homebuying process, refinancing your mortgage and more — so you can feel confident when you make decisions as a homebuyer and a homeowner. Bankrate logo

Editorial integrity

Bankrate follows a strict , so you can trust that we’re putting your interests first. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions.

Key Principles

We value your trust. Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. We maintain a firewall between our advertisers and our editorial team. Our editorial team does not receive direct compensation from our advertisers.

Editorial Independence

Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information. Bankrate logo

How we make money

You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. When you buy a home, there are usually a few repairs to pay for. Buyers who want to take on a real might be facing the prospect of many projects. If this is the case for you, you may be considering an FHA 203(k) loan, also known as a mortgage rehab loan or Section 203(k) loan, which combines the financing for both the home’s purchase and remodeling or repairs into a single loan.

What is an FHA 203 k loan

An FHA 203(k) loan is a mortgage product backed by the Federal Housing Administration that allows homebuyers to borrow enough money to cover both the cost of the home and the price of necessary repairs, including labor and materials. Certain 203(k) loans may include funding for up to six months of mortgage payments. Note that the FHA does not lend the funds for 203(k) rehab loans. Rather, it provides financial protection to lenders that do.

How does an FHA 203 k loan work

A 203(k) renovation loan can be a 15- or 30-year fixed-rate mortgage or an (ARM). The amount you can borrow depends on criteria such as credit rating and income. The down payment requirement for an FHA 203(k) renovation loan for 2022 continues to be 3.5 percent of the purchase price, or 10 percent if your credit score is below 580. The total amount borrowed through 203(k) loans must be within FHA loan limits for the area in which the home is located. Generally, the most you can borrow for the loan is the lowest of the following: The FHA’s maximum loan limit for the county where the property is located A calculation involving the home’s “before” value plus improvement costs A calculation involving the home’s “after” value, including the improvements In most cases, the renovations are done by a licensed contractor, but occasionally, a 203(k) loan borrower can do some or all of the work themselves. This requires approval from the lender. A 203(k) loan is a good fit for older homes, but not ones that are fairly new and don’t need a minimum of $5,000 in renovations. “It’s a good idea to consider different types of financing if you are anticipating minor repairs, since a 203(k) is better suited for major projects that are necessary to transform neglected properties into more habitable living spaces,” explains Bruce McClary, senior vice president of communications for the nonprofit National Foundation for Credit Counseling in Washington, D.C. A 203(k) loan also offers solid for cash-strapped homeowners who either can’t or don’t want to tap their home equity.

Types of FHA 203 k loans

The FHA insures two types of 203(k) loans: Limited 203(k):
The limited 203(k) loan has an easier application process because it’s for projects valued at less than $35,000. There is no minimum cost requirement, but you can’t pay for structural repairs with this type of loan. Standard 203(k):
The standard 203(k) loan is for extensive jobs costing more than $35,000. The minimum loan amount for this type is $5,000. Structural changes, like additions or full home renovations, are permitted. The homebuyer must obtain architectural exhibits and meet building codes.

FHA 203 k loan qualifications for 2022

The main restriction for an FHA 203(k) loan is that the borrower has to be the owner or occupant. Investors are not eligible for this kind of loan, although in certain situations, nonprofit organizations may be allowed to obtain one. Other qualification criteria include: A minimum credit score of 500 or higher 3.5 percent minimum down payment or 10 percent if your credit score is below 580 43 percent-45 percent maximum debt-to-income (DTI) ratio There are also minimum energy-efficiency and structural standards that the project must meet in order to qualify.

Ways to use FHA 203 k loans

FHA 203(k) loans come with some other strings attached. For one, the work must be completed within six months after closing, depending on the scope of the project. The FHA limits the projects to structural alterations and reconstruction, and modernization and improvements to the home’s function. The contractor you work with should be familiar with this kind of loan, especially the payment schedule and requirements. Be sure to ask the contractors you’re considering about their experience with 203(k) loans. When the renovations are completed, you as the borrower are required to provide a letter, and a HUD-approved consultant will conduct an evaluation of the work. Consultants can be found through a lender or via the .

Acceptable repairs

A standard 203(k) loan can cover many projects. This is a partial list: Structural alterations and reconstruction Modernization and improvements to the home’s function Elimination of health and safety hazards Changes that improve appearance and eliminate obsolescence Reconditioning or replacing plumbing (for example, installing a well and/or septic system) Adding or replacing roofing, gutters and downspouts Adding or replacing floors and/or floor treatments Major landscape work and site improvements Enhancing for a disabled person Making energy conservation improvements

What isn t allowed

Work on certain kinds of properties, such as co-ops, is not allowed to be financed with a 203(k) loan. Mixed-use properties with both commercial and residential space may be eligible if the work being done is solely for residential usage. There are also projects that don’t qualify for 203(k) financing. Basically, if the change doesn’t result in a true upgrade in terms of function or enhanced attractiveness to the home, you can’t use a 203(k) loan to pay for it. Examples of projects the loan won’t cover include luxury add-ons, such as: Swimming pool Hot tub Tennis court Barbecue pit Outdoor fireplace Satellite dish

Cost of an FHA 203 k loan

for FHA 203(k) loans are similar to other mortgages and refinances, typically 2 percent to 6 percent of the sales price of the home. However, some lenders may charge supplemental fees for this type of financing. The FHA sets the rules on which closing costs can be paid by the borrower. All other costs are usually not allowed and are the seller’s responsibility, or the lender’s if you’re refinancing an existing loan. Some costs you can expect to pay include: Lender Appraisal and inspection fees Title insurance and title search Credit report check Property survey A 203(k) loan also requires an upfront mortgage insurance payment of 1.75 percent of the total loan amount, which can be wrapped into the financing. You’ll also pay a monthly mortgage insurance premium based on your loan-to-value (LTV) ratio and length of the mortgage

FHA 203 k loan pros and cons

Like any mortgage, there are advantages and disadvantages to an FHA renovation loan: Pros One loan for both purchase and renovations Low minimum down payment requirement Relatively low credit score requirement Potentially lower interest rates compared to personal loans, credit cards or other Covers mortgage payments if the home can’t be lived in during renovations Cons required Rates may be higher compared to conventional loans Process may require meeting with a 203(k) repair consultant More extensive repairs require more paperwork Potential for the additional cost of architectural assessments Property must be your primary residence

How to find an FHA 203 k loan lender

You can only obtain a 203(k) loan through an FHA-approved lender. HUD’s allows you to search for approved lenders offering FHA rehab loans in your area. Because the application process and requirements associated with this type of loan can be complex, confirm the lender you select has experience with 203(k) loans.

FHA 203 k loan refinancing

FHA 203(k) loans can be used both to purchase a fixer-upper or rehabilitate the home you already live in through a refinance. The process to refinance into a 203(k) loan is similar to a regular refinance, but you must meet the additional requirements of the 203(k) loan. After refinancing, a portion of the 203(k) proceeds will pay off your existing mortgage, and the rest of the money will be kept in escrow until repairs are completed. Existing 203(k) mortgages can also be refinanced through the , which may help you get an even lower interest rate.

Other ways to finance a home renovation

FHA 203(k) loans are one of several options for homeowners looking to renovate. Among the others: Home equity lines of credit – HELOCs come with one significant caveat: To borrow against your house, you must have plenty of . Before considering a HELOC, make sure the value of your home is significantly higher than the amount you still owe on your mortgage. HELOCs usually close quickly and carry variable interest rates. Home equity loans – Essentially a second mortgage, a home equity loan comes with a fixed interest rate. As with a HELOC, you’ll need sufficient equity. Financial technology company willing to lend against the value of a home after improvements. Fannie Mae HomeStyle or Freddie Mac CHOICERenovation loans – The and CHOICERenovation options also allow you to borrow against the future value of your home. – In this scenario, you borrow more than you owe on your existing mortgage and apply the proceeds to renovations. This requires equity in your home. Construction loan – A home is a short-term, higher-interest loan that provides the cash to pay the contractors. The property owner typically needs a longer-term mortgage after the work is completed. Selling a stake in your home – A new breed of financial technology firms is pitching American homeowners on a different way of tapping into home equity. If you’re sitting on a pile of it, these companies — including Haus, Hometap, Noah, Point and Unison — will buy a piece of your house. You repay the “co-investment” when you sell. One downside: This money comes at a higher cost than a mortgage or HELOC.

Bottom line

If you’re looking for affordable financing to remodel or upgrade your home, whether you’re a longtime homeowner or a , an FHA 203(k) loan may be a good option. Do some comparison shopping to determine what will work for you and to for your situation. SHARE: Libby Wells covers banking and deposit products. She has more than 30 years’ experience as a writer and editor for newspapers, magazines and online publications. Suzanne De Vita is the mortgage editor for Bankrate, focusing on mortgage and real estate topics for homebuyers, homeowners, investors and renters. John Stearns, CMC, CRMS is a Senior Mortgage Loan Originator with American Fidelity Mortgage.

Related Articles