08/27/2025
An FHA 203(k) loan is a government-backed mortgage that combines the cost of buying or refinancing a home with the expenses for qualified repairs and renovations. The total loan amount is based on the home's projected value after the improvements are completed.
This loan is particularly useful for purchasing a "fixer-upper" that might otherwise fail to meet the livability standards of a traditional mortgage.
Types of 203(k) loans
There are two main types of FHA 203(k) loans, each suited for different levels of renovation:
Limited 203(k): For minor, non-structural repairs and improvements, such as a kitchen update, new flooring, or new appliances.
Maximum renovation amount: $35,000.
Process: Requires less paperwork and has an easier qualification process.
Standard 203(k): For major projects, including structural repairs, additions, or projects costing more than $35,000.
Minimum renovation cost: $5,000.
Process: Requires oversight from a HUD-approved 203(k) consultant.
How a 203(k) loan works
The process of a 203(k) loan differs from a conventional mortgage:
Find a property: You find a home you want to purchase or a property you already own that needs repairs.
Contact a lender: You work with a HUD-approved lender to apply and create a detailed project plan that includes cost estimates. For a Standard 203(k) loan, a HUD-approved consultant will help with this process.
Get an appraisal: An appraiser determines the home's value based on its condition after the planned renovations are complete.
Close on the loan: After the loan closes, a portion of the funds is used to purchase the home or pay off the existing mortgage. The remaining funds for the renovations are held in an escrow account.
Complete the renovations: As your contractor completes the work, funds are released from the escrow account in draws. An inspector may need to verify the work at different stages.
Requirements and qualifications
Credit score: A minimum credit score of 580 is typically required for the lowest down payment, though some lenders may require 620–640.
Down payment: The minimum down payment is 3.5% of the total loan amount (purchase price plus renovation costs) if your credit score is 580 or higher.
Occupancy: The home must be your primary residence. It cannot be an investment property.
Mortgage insurance: You must pay an upfront mortgage insurance premium (UMIP) and a monthly premium (MIP) for the life of the loan.
Renovation restrictions: The loan cannot be used for "luxury" improvements like swimming pools or tennis courts. The work must also be completed by a licensed contractor.
Pros and cons
Pros:
Single loan: Combines the home purchase/refinance and renovation costs into a single loan with one monthly payment.
Easier qualification: FHA backing allows for lower credit score and down payment requirements than many conventional loans.
Fixer-upper financing: Makes it possible to buy a home that would not otherwise qualify for a traditional mortgage.
Finances for temporary housing: Can cover up to six months of mortgage payments if you cannot live in the home during renovations.
Cons:
Mortgage insurance: You are required to pay upfront and monthly mortgage insurance premiums.
Higher interest rates: Rates may be slightly higher than a traditional FHA loan because of the renovation component.
Complex process: The loan has more paperwork and can take longer to close than a standard mortgage.
Renovation limitations: There are rules on the types of renovations and the timeline for completion.
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