How Does an FHA 203K Mortgage Work

By
Real Estate Agent with RE/MAX Executive Realty 91362

What is an FHA 203k Mortgage?

If you want to renovate your home or buy a property that requires many improvements, an FHA 203k loan is an option worth considering. You can use this type of mortgage to buy a home or refinance, and it will give you the money to make the necessary renovations.

The beauty of an FHA 203k rehab loan is you can get a mortgage to purchase and make renovations in one loan instead of two.

An FHA 203k loan is backed by the Federal Housing Administration and offers lower financial requirements when compared to most other renovation mortgages. This can increase your options when looking to buy, particularly in areas with higher value homes.

Let's look at how an FHA 203k mortgage can help you pay for home improvements and the things you need to know before you choose this home loan.

How Do FHA 203k Rehab Loans Work?

You have two options when looking to get an FHA 203k rehab loan; standard or limited. If you already own a home, both of these options are available for refinancing as well.

The 203k limited loan, previously known as a streamline loan, offers you up to $35,000 to complete your renovations. Under the rules of this mortgage, you aren't allowed to complete major structural repairs, however.

The 203k standard loan allows you to undertake major structural work on the home, but you must hire a HUD consultant to oversee the project. There is a minimum renovation cost of $5,000, though you can't use these funds for upgrades considered a luxury, which is true of the limited loan.

What Can You Spend Your FHA 203k Loan On?

While you can't use this financing to pay for luxury upgrades, like a swimming pool, for example, it will cover most types of renovation. This includes:

  • Fixing any safety hazards
  • Replacing or upgrading flooring
  • Major landscaping projects
  • Repairing the roof or gutters
  • Renovating the plumbing
  • Increasing energy efficiency
  • Making the home more attractive
  • Improving access to the home for a disabled person

To meet the requirements set out in an FHA 203k loan, you must ensure that the work is completed by why a correctly licensed contractor. These improvements will also need to be approved by an FHA appraiser, and in the case of a standard loan, your HUD consultant as well.

You will want to begin your project quickly after closing as renovations must be completed within 6 months. More paperwork is involved with a renovation funded by an FHA 203k mortgage, so you might want to find experienced contractors with this type of project.

Will You Qualify for an FHA 203k Rehab Loan?

Since this is still an FHA home loan, it is generally easier to qualify than a conventional mortgage. Credit scores can typically be lower than what most lenders consider "good."

As with other FHA loans, you'll need a credit score of 500 or better, though lenders can set higher credit score requirements if they wish. There is a minimum down payment requirement of 3.5% if your credit score is above 579.

With a credit score between 500 and 579, you need 10% down. Finding a larger down payment could be a bigger problem if you have a lower credit score, but gifts from friends and family can make it easier. There are also state home buyer programs and other grants available to help you find the money for a down payment.

There are limits on the amount of money you can get from an FHA loan. The exact amount will vary depending on your location, with the most expensive areas being limited to $822,375. The lower-cost region loan amount is capped at $356,362.

If you have been in foreclosure recently, you will not be approved for an FHA loan. So with a foreclosure in the past 3 years, you'll need to wait a while to apply.

How to Apply for an FHA 203k Mortgage

Before you apply for a 203k loan, you'll need to compare FHA-approved lenders to find the right home loan for your situation. Not every lender that is FHA-approved will be experienced in offering 203k loans to borrowers. But from the ones that do, you’ll need to find the one who's going to offer you the best deal on your home loan.

When you are happy with the lender, they’ll want your Social Security number and documents to prove your debts and income. They’ll also check your credit score and your credit report before they will approve your mortgage application.

Should You Choose an FHA 203k Loan?

If you are looking to refinance and you need the funds to renovate, it should be something you consider. When you want to buy a home that you know needs a lot of repairs, a 203k could tick all your boxes.

Before you decide for sure, you should carefully consider all the pros and cons so that you don't spend years paying off a mortgage with unfavorable terms.

203k Pros

  • Offers low minimum requirements for approval
  • Less costly when compared to personal loans or credit cards
  • FHA loans normally have lower closing expenses
  • Will cover costs if you are unable to live in the home during renovations
  • Easier to qualify for than a similar conventional mortgage

203k Cons

  • If you are an investor, this isn't a home loan you’ll be approved for
  • You will have to pay mortgage insurance on the loan
  • If you choose a standard loan, you'll need to pay extra for a HUD consultant
  • The paperwork requirement is more difficult for the contractor, so you might need to find someone with experience in these projects
  • Origination and appraisal fees are often higher than conventional loans

Alternatives to the FHA 203k Loans Program

If you want to make improvements that are considered luxuries by the FHA, there are other options. Also, if you have a better credit score, you might find a 203k loan isn't your best choice.

Fanny and Freddy both offer conventional renovation loans that may be more suitable. Fannie Mae offers the HomeStyle loan, and Freddie Mac has CHOICERenovation loans, which you might want to consider.

Final Thoughts

The FHA 203k mortgage is an excellent mortgage program that will be worth looking into when you're buying a fixer-upper property. As with any financing program, make sure you do thorough research and work with a top mortgage broker.

Posted by

Bill Gassett is a thirty-two year veteran to the real estate industry. He enjoys providing helpful information to buyers, sellers and fellow real estate agents to make sound decisions. His work has been featured on RIS Media, National Association of Realtors, Inman News, Placester, RESAAS, Credit Sesame and others.

Comments (1)

Grant Schneider
Performance Development Strategies - Armonk, NY
Your Coach Helping You Create Successful Outcomes

Hi Bill - that might be an option consider the large inventory shortage.

Aug 19, 2021 03:51 AM