What is an FHA 203K and How Can I Qualify? 

The Federal Housing Administration agency plays a critical role in the U.S. by providing access to affordable credit for many underserved communities. FHA 203K loans are a lesser-known type of mortgage every homeowner should know about.

From hopeful first-time home buyers to those who just want to fix up a home they already have, the FHA makes it possible where many other lenders won’t take the risk.

If you are in the market for a home or need repairs on your current one, you should know about the FHA 203k loan program.

What is an FHA 203k loan?

“The FHA 203(k) loan is designed for individuals seeking to purchase real estate that requires extensive repairs. This is actually a subcategory of the FHA Mortgage.

One benefit of this type of this financing is that you can combine the cost of the property, as well as the home improvement expenses, into one loan,” explains Rhett M. Struve of Keller Williams Premier Realty.

It aims to help revitalize neighborhoods and expand opportunities for homeownership.

Struve adds, “As with the FHA Mortgage, the 203k Rehab Loan requires mortgage insurance and interest rates are typically higher than conventional loans.”

Background on FHA loans

If you are not familiar, the FHA stands for the Federal Housing Administration. It is an agency of the U.S. Government that provides mortgage insurance on loans which are extended by approved lenders.

FHA loans vs. conventional mortgages

The FHA has guidelines for eligible properties, borrower qualifications, and loan process. As a borrower, you apply for the loan and the lender ensures your situation meets all the requirements. If it does, they approve you.

If you happen to default for some reason, the FHA will repay the lender for the loan. As a result, lenders face less risk and can lend to people with lower credit scores and higher debt-to-income ratios.

Pros and cons of FHA loans

A few lenders that offer FHA loans include Guaranteed Rate, New American Funding, and Quicken Loans.

Click here to compare rates and shop for other leading mortgage lenders.

The FHA 203(k) is very helpful because standard home improvement loans are known to have short repayment periods, high costs, and balloon payments.

On the other hand, with the 203(k), you can choose from a 15- or 30-year fixed or adjustable-rate mortgage. A portion of the loan proceeds go to the seller, and the remaining amount is placed into an escrow account to pay for the rehabilitation.

The funds in escrow are released gradually as the rehab is completed. If you can’t live in your home during the renovations, you can finance up to six months of your mortgage payment into the loan.

How much can you get from a 203k loan?

FHA 203k loan limits require a rehabilitation cost of at least $5,000. The total value of the finished house cannot be over the FHA mortgage limit for the area.

Property value is determined by the sum of the value of the house at the time of sale and the costs of the rehabilitation or 110% of the post-rehab value of the property (whichever is less).

Calculate your Maximum Mortgage amount using HUDs 203k loan calculator.

The Limited 203(k) Mortgage, also known as the FHA 203(k) streamlined loan, allows for the financing of up to $35,000 in repairs, upgrades, or improvements. This option is recommended for homeowners and buyers planning smaller projects with costs under the $35,000 limit.

Compare other home improvement financing options

How do I qualify for a 203k loan?

To qualify for a 203(k) loan, you will need to do the following:

  • Contact a HUD-approved Housing Counseling Agency with any questions you have.
  • Speak with a real estate professional to find a property that will be a good candidate for 203(k) (this is not needed if you want to refinance and make improvements to your current home).
  • Shop around and compare lenders from the FHA 203(k) loan lenders. Tell them you are interested in an FHA 203(k) loan program.
  • The lender will assign you a 203(k) consultant who will help you plan the work, get a home inspection, and develop estimates.
  • Apply and find out if you qualify.

Eligibility requirements are the same as for an FHA loan, including a Minimum Decision Credit Score (MDCS) of 500.

FHA 203k loan requirements

What kind of home is eligible for a 203k loan? Here are the property types that qualify:

  • Homes must be at least one year old
  • One- to four-unit residences
  • Condos in one to four-unit buildings
  • Demolished homes or those that will be razed during rehab work which have some of the original foundation in place
  • Conversions: one-unit buildings into two-, three-, or four-unit buildings, or multi-unit dwellings down to one- to four-unit family units
  • Mixed-use residential properties that include commercial space
  • Moving an existing house or modular unit to the mortgaged property

Note that investment and cooperative properties are not eligible. It must be a single-family property that will be the primary residence of a family or individual.

FHA 203k guidelines

What kind of activities are eligible for a 203(k) loan? Here is a list of examples:

  • Improvements that conserve energy
  • Landscape work
  • Improvements to the site
  • Increasing accessibility for the disabled
  • Reconstruction or structural changes
  • Improving the home’s functionality
  • Eliminating hazards to health and safety
  • Making improvements to the appearance of the home
  • Installation of a septic tank or well
  • Plumbing work
  • Roofing, gutter, and downspout installation, replacement, and repair
  • Adding or replacing flooring
  • Remodeling bathrooms or kitchens
  • Repair swimming pool (no new swimming pools)
  • Adding a patio, porch, or deck
  • Adding family rooms, bedrooms, or bathrooms
  • Expanding a garage or carport

The rehabilitation can range from minor (but costing more than $5,000) to almost full reconstruction. The most important improvements include fixing any problems that violate building codes, making the home safer, and modernizing.

Next, the eligible cosmetic and other minor repairs can be made. Improvements for commercial use or luxury items are not permitted.

Discover the top 10 money-making home improvements based on ROI

What is a 203b FHA loan?

A 203(b) loan is an FHA loan that is intended for a home that does not need extensive work. It is the more common FHA loan and is the right choice if your home needs less than $5,000 in repairs.

Is an FHA 203k loan right for you?

The FHA 203k is a helpful solution for those who are looking to buy a home that needs some repairs.

Instead of struggling to get approved for two loans or settling for high rates and unfavorable terms, you can get decent rates and all of the money in one package. Further, it’s a great option if your credit isn’t great and if you are in the low-income bracket.

Remember, even when getting an FHA loan, it pays to shop around. Lenders vary from one to the next in terms of rates, fees, and the quality of service they offer. So, you’ll want to vet at least three companies and read real-user reviews.

Click here to easily compare mortgage lenders side-by-side.