The Rehabbers’ Guide to 203(k) Loans

Real Estate Agent with RE/MAX Professional Associates


Tight-fisted lenders have made home equity loans harder to come by. So what’s a fixer-upper to do? Meet the 203(k) loan.

Lenders’ weak stomach for extending credit doesn’t have to sour your upgrade dreams. The old but new again FHA 203(k) loan rolls remodeling and mortgage costs together, whether you’re buying or refinancing an existing home loan to pay for upgrades.

First, some 203(k) basics:

  • 15- or 30-year term option
  • ARM or fixed-rate option
  • 3.5% down payment; other FHA loan qualifications apply
  • Interest rate a tad higher than market
  • Higher fees compared with equity or other FHA loans, for such things as title checks, architectural plan reviews, appraisal, and FHA inspections
  • No balloon payment
  • Loan amount = projected value post-rehab, including the cost of the work
  • FHA loans take longer to close than conventional mortgages
  • More paperwork than a straight mortgage loan

Now, 13 rules for what you can and can’t do with a 203(k):

1. You can buy a fixer-upper so awful it wouldn’t qualify for a regular home loan. Whether buying or refinancing, all that needed work might keep your home from qualifying for a regular bank loan. Banks don’t finance homes in ill repair because they’re too hard to resell if they have to take the house back via foreclosure.

2. You can DIY with a 203(k) if you can show you know how to DIY. You can do the work yourself, or act as your own general contractor, if you can prove you’ve got the chops, and can get the job done on time (the maximum timeframe is six months). Of course there’s a catch: When you DIY, you can only use the 203(k) proceeds for supplies. You can’t pay yourself to do the work on your own house.

3. You can use a mini 203(k) for mini-sized projects. If you’re just doing your kitchen, bathroom, or another project that costs $35,000 or less, there’s a streamlined version of the 203(k) designed just for limited-size projects.

4. You can’t use it to buy a new-construction home. The house you’re fixing up has to be at least a year old.

5. You can’t use it to buy and install a new toilet, even one of those fancy Totos. You have to spend at least $5,000 on your renovation to use the 203(k) program. And the whole mortgage, including those remodeling costs, has to be under the FHA mortgage limit for the area where you live.

6. You can expect the lender to be up in your grill about how and when the home improvements get done. An inspector will be dispatched to your home multiple times to check in on the progress, which is why rule #7 is so important.

7. You have to keep your contractor from going on a long vacation to Europe.

  • Your contractor has to start work within 30 days of the loan closing.
  • He can’t stop working on the project for more than 30 days.
  • He has to get the whole job done within six months.

Doing it yourself? The same timelines apply. So no long vacations for you until the work gets done.

8. You can use the loan to make your mortgage payments if you can’t live in the house until the work is done. This is one sweet provision of the 203(k) program because it means you don’t have to make a mortgage payment on the home you’re remodeling and pay to live somewhere else while the work is going on.

You can use the 203(k) loan to pay for up to six months of principle, interest, taxes, and insurance payments when your property is going to be uninhabitable because of the renovation work.

9. You can use it to make energy-efficiency upgrades like installing a new furnace, windows, or attic insulation. You can get a 203(k) loan to pay for 100% of the cost of energy-efficiency improvements. You don’t have to get those improvements appraised, but they do have to be cost-effective, meaning they’ll pay for themselves over their useful life. The HUD inspector will make the call.

10. You can rip the house down if you plan to build something in its place. As long as you keep the foundation of the home, you’re good to go.

11. You can have a little shop downstairs. It’s kosher to use a 203(k) loan to remodel a home that includes some commercial space, as long as you use the money only for projects in the residential part of your home and the amount of commercial space doesn’t exceed these limits:

  • 25% for one-story building
  • 49% for two-story
  • 33% for three-story building
12. You can use a 203(k) for a condo unit, but … your condo building must have FHA approval— which is tough to get these days — or meet VA, Fannie Mae, or Freddie Mac guidelines. Also, your building can have no more than four units, though there can be multiple buildings in the association.

13. You can’t break these rules or the lender can take its money back.Like immediately. Your lender can also refuse to advance you any more money or apply any money left in the escrow account to reduce what you owe on the mortgage.

Now…who has a hammer?

Re-Blogged 4 times:

Re-Blogged By Re-Blogged At
buying a home
distressed properties
construction loans
fixer upper
rehab loans
amy mullen
purchasing a house that needs work

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Gita Bantwal
RE/MAX Centre Realtors - Warwick, PA
REALTOR,ABR,CRS,SRES,GRI - Bucks County & Philadel

Thank you for the post. I will bookmark this and share it with others.

Mar 06, 2012 08:55 PM #1
Chuck Carstensen
RE/MAX Results - Elk River, MN
Minnesota Real Estate Expert

Thanks for all the details. This will be a great one to reblog.  I dont think many understand the 203k loan.

Mar 06, 2012 09:13 PM #2
Tiffany Chapdelaine Wetherbee
Sankey Real Estate - North Attleboro, MA

Thank you for putting that in a great easy to understand format I will definately share this one!lingaro

Mar 06, 2012 09:27 PM #3
Gary Smith

May I add a comment?


#2 :: ...and you must add the fair labor for the role you're taking on. In other words, a DYI must add the cost of Materials and labor on the bid/work write up, in the event you are unable to do the work, there's money in the repair budget to hire a professional. 

Gary Smith

203K Consultant 

Mar 07, 2012 08:06 PM #4
Michelle Carr-Crowe-Top 1% Diamond Certified Real Estate Team Sells Cupertino San Jose Homes-Just Call 408-252-8900
Get Results Team...Just Call (408) 252-8900! - San Jose, CA
Family Helping Families Buy & Sell Homes 40+ Years

Thanks for an informative and detailed post on this under-utilized program. Also, I subscribed to your blog, you can read (and subscribe to) my blog about Cupertino, Saratoga and San Jose, Calif. homes, real estate and events at

Mar 12, 2012 06:40 AM #5
Paul Welden
203k Contractor Program - Tempe, AZ

Amy - great job of breaking down the 203k!

Here's a comment I have on 5. You can’t use it to buy and install a new toilet,

Actually, you can use the 203k to only buy a toilet. The Streamline 203k (Mortgagee Letter 05-50) has a $0 minimum rehab. While it may not be cost effective to do a 203k with less than $5k in rehab, it is possible with the Streamline 203k.

And please use a HUD approved 203k Consultant on the Streamline 203k.

Gary is spot on with his comment about including cost of labor in a DYI 203k. He is one of the best 203k Consultants available nationwide, and his advice/guidance is extremely helpful.

Keep up the good work, Ann! Very few Realtors embrace the 203k. I hope you can make 2012 the year of the 203k.

Paul Welden
203k Contractor Program

Mar 15, 2012 01:32 PM #6
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