What is an FHA 203(k) Loan?

If you’re looking to purchase a fixer-upper or renovate your current home, an FHA 203(k) loan may be a smart option. This loan allows you to finance both the home purchase (or refinance) and the cost of repairs in a single mortgage.

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

• Standard 203(k): For major renovations exceeding $75,000 (increased from $35,000 as of Nov. 4, 2024).
  
• Limited 203(k): For smaller projects under $75,000, typically cosmetic in nature.

Refi.com does not currently offer financing for this loan type.

Eligible Home Projects for the 203(k) Renovation Loan

You may be surprised by the variety of repairs and upgrades that qualify under the FHA 203(k) program. Eligible uses include:

• Structural repairs (foundation, roof, or load-bearing walls)
  Only available with the Standard 203(k)
• Cosmetic renovations, such as kitchen or bathroom remodels
• Accessibility improvements, like ramps, widened doorways, or handrails
• Energy-efficiency upgrades, including new HVAC systems, insulation, or solar panels
• Safety and hazard remediation, such as mold removal, asbestos abatement, or electrical system fixes

If applying for a Standard 203(k) loan, a HUD-approved consultant must inspect the property and provide a report of the required repairs. This document is a critical part of the loan process.

It’s important to note that anyone seeking a Standard 203(k) rehab loan will need to meet with a U.S. Department of Housing and Urban Development (HUD) consultant. This HUD professional will access the property as well as the proposed renovations and repairs.

From their analysis, they will create a document describing the needed repairs, which will be an essential component of the loan application.

Related: Pay For Home Repairs With a Refinance

FHA 203(k) Loan Requirements

Unlike some other types of FHA refinances, you don’t have to have an existing FHA mortgage use a FHA 203k rehab loan. As this loan allows home repair and renovation costs to be wrapped in with the refinance of the home, homeowners should anticipate additional requirements to obtain lending.

Here are some key eligibility criteria: 

• Down Payment / Equity:
  
  • Purchases require a 3.5% down payment (based on total acquisition + improvement cost).
    
  • Refinances may not require existing equity, since the loan is based on the home’s after-renovation value.
    
• Debt-to-Income (DTI) Ratio:
  
  • Generally must be below 43%, though some lenders may allow higher ratios with compensating factors.
    
• Credit Score:
  
  • Most lenders require a minimum of 580, though higher scores may improve approval odds and rates.
    
• HUD Consultant:
  
  • Required for Standard 203(k) loans; optional for Limited loans.
    
• Appraisal:
  
  • A detailed appraisal is needed to determine both the current value and projected post-renovation value.
    
• Approved Contractor:
  
  • Borrowers must hire a licensed and insured contractor to complete repairs within a set timeframe.
    
• Loan-to-Value (LTV) Ratio:
  
  • Must meet the lender’s guidelines, based on the lower of the purchase price or appraised value.

Note: Lenders may set their own overlays in addition to FHA guidelines.

Benefits of FHA 203(k) Loans

Paying for home repairs out-of-pocket often isn’t an option for most homeowners. With most major home projects costing thousands of dollars, one of the major benefits of FHA 203(k) rehab loans is the ability to finance these expenses along with the mortgage or refinance. 

In addition to the 203(k) loan making it feasible for homeowners to complete necessary renovations, many also benefit from:

• 580+ credit score
• Base the loan amount on future value
• Lenient income and debt-to-income requirements
• Easier to qualify for than conventional rehab loans

Current FHA 203(k) Loan Rates

Current FHA 203(k) loan rates will depend on a variety of factors. From the current market conditions to your individual financial standing, there is quite a bit that goes into determining an individual’s mortgage rate. 

Speaking to a trusted lender is the best way to receive accurate answers when it comes to your individual mortgage rate for an FHA 203(k) renovation loan. 

Get started here to view rates from Refi.com.