FHA 203(K) Renovation Loans: Requirements, Eligibility, & Fees Explained

Written by Elijah BishopReviewed by Nathan Brown, CFP®Updated: 4th May 2022
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FHA 203(k) loans offer those looking to buy a home and make it their own a unique experience.

Instead of only focusing on the home, the loan takes a look at renovations, allowing buyers to borrow and add the cost of renovations into the mortgage loans.

Because of its structure and the opportunity homebuyers score when they are approved for an FHA 203(k) loan, those looking into purchasing a home and applying for a mortgage should look into them to see if they match their home buying goals.

What Is an FHA 203(K) Loan?

An FHA 203(k) loan is a mortgage that is insured by the Federal Housing Agency (FHA). One of the main motivations of the FHA with this loan is the fact that it expands homebuyer’s options, allowing them to look at homes that they might not have previously considered.

This is especially useful in areas where purchasing a home is in high demand or out of their budget, allowing them to live in the neighborhood of their dreams while creating the future home of their dreams.

The loan total covers the cost of the home and the refinance price, along with some wiggle room to factor in renovations over time.

>> More: What Is an FHA Loan?

How Does an FHA 203(k) Loan Work?

FHA 203(k) loans work by covering both the cost of the home and all the repairs and renovations needed to make it livable or more enjoyable.

Instead of finding ways to finance the cost of renovations alone, buyers can take options to finance 15 to 30 years with a fixed-rate mortgage and apply expenses to that mortgage that involve materials, labor, and more.

We’ll go into more detail about the different types of FHA 203(k) loans and what they mean for you as a homebuyer.

Types of FHA 203(k) Loans

There is more than one type of FHA 203(k) loan. Each has its own set of rules involving the amount buyers can borrow and what can be done with funds once everything is approved.

The two types of FHA 203(k) loans are:

  • 203(k) Standard Loan: A standard loan is typically used for homes that need much more repairs. Standard loans are typically over $35,000 and include repairs on both minor and major structural damage. One of the key requirements is that renovations must cost more than $5,000, and a consultant from the U.S Department of Housing and Urban Development (HUD) has to oversee the project. Other standard terms and conditions apply that follow the government code.
  • 203(k) Limited (“Streamline”) Loan: Streamline loans are a little less intense, perfect for homes that just need a few touch-ups here and there. There is no minimum cost for repairs, and loans go up to $35,000. The process of a streamline loan is much easier, as there is much less paperwork to consider. There is also no requirement to have agents overseeing repairs or any other restrictions on that matter. Though this is a much simpler process, borrowers cannot use the amount for major structural repairs as per the requirements.

>> More: Government Home Loans

What Can an FHA 203(k) Loan Be Used For?

Perhaps the best thing about FHA 203(k) loans is that they come with a lot of variety. Borrowers can use their funds for a number of projects, some of which include:

  • Aesthetic touchups
  • Roofing or flooring installations or repairs
  • Energy improvement for better efficiency
  • Improving accessibility
  • Repair or replacement of plumbing or waste systems
  • Renovation of the current landscape or groundwork
  • Improvement of gutters and downspouts
  • Modernizing the appearance or interior features of the home

FHA 203(K) Loan Qualifications: Who Is Eligible?

The FHA 203(k) loan is a mortgage and therefore comes with a few requirements. Buyers have to meet a standard set of requirements in most cases and, in extreme circumstances, will need to go through more rigorous requirements the more the home needs repair.

FHA 203(k) loans are typically available for:

  • A decent credit score of no less than 500
  • A down payment, usually amounting to no less than 3.5% of the total price of the home (could go up to 10% for credit scores under 580)
  • The property of interest must be the borrower’s primary residence and cannot be used as a second home or rental property
  • All repairs and renovations must take place with a contractor (no DIYers)

Can You Use an FHA 203(k) Loan to Refinance Your Home?

Not only can those on the hunt for a home take advantage of an FHA 203(k) loan, but current homebuyers can too.

Homebuyers have the option to apply for this loan and refinance their current mortgage along with repairs and renovations.

Though this is permitted, current homebuyers should check the requirements in their area.

Circumstances involving refinancing a property come with additional requirements, all of which buyers will have to qualify for.

Pros and Cons of FHA 203(k) Rehab Home Loans

While FHA 203(k) loans sound like the perfect problem solvers, they are not without faults. Due to the nature of the requirements and qualifications, these loans may not be for every situation, so read through the pros and cons before you take action.

Pros:

  • Great options for those with lower credit scores
  • If repairs require the home to be vacant, temporary housing is provided
  • Interest rates are far lower than the market
  • Options to tie in refinancing with renovations
  • Those with decent credit can qualify for a much lower down payment

Cons:

  • The application process is tedious (especially for standard FHA 203(k) loans)
  • Investment or rental properties do not qualify
  • Borrowers must have insurance on their mortgage
  • Some loan structures require a contracted professional to oversee renovations

FHA 203(k) Rehab Loans vs. Conventional Home Rehab Loans

FHA 203(k) loans are a great option because they don’t require spotless credit scores like most conventional home loans.

Additionally, buyers can create the home of their dreams, factoring it into their mortgage instead of having to do it on their own.

Where conventional loans win is the fact that the process is much shorter, and families get to move into their home as soon as closing and signing is complete.

>> More: FHA vs. Conventional Loans

How Do I Get an FHA 203(K) Loan?

The first thing you’ll have to do to get an FHA 203(k) loan is to find an FHA-approved lender. Part of the process requires documentation that shows proof of income, credit scores, and your social security number. From there, it just depends on the specifics of your loan, with each home buying experience unique from all others

When does an FHA 203(K) Loan Make Sense?

In certain cases, yes. For those that have an area in mind but are not quite finding the home to fit their style, FHA 203(k) loans are perfect.

Also, those who are buying their home and want to refinance while giving it a bit of an update can benefit, taking advantage of the FHA 203(k) loan’s unique structure.

Bottom Line: What Is an FHA 203(K) Loan?

Whether you want to refinance or you want a home that needs a few repairs, the FHA 203(k) loan could be the answer to all your home buying dreams. Take a look at requirements in your area, and get the process started today.

Elijah Bishop
Elijah Bishop

Elijah A. Bishop is a Senior Personal Finance Writer who has been writing about real estate and mortgages for years. He has a Bachelors of Arts Degree in Creative writing from Georgia State University and has also attended the Climer School of Real Estate. He also holds a realtor license and has been in and out of the US mortgage industry as a loan officer. Bringing over 15 years of experience, Elijah produces content that analyzes ethnicities, race, and financial well-being. His areas of expertise are mortgages, real estate, and personal loans.