FHA 203(k) Loans: Finance Your Fixer-Upper

FHA 203(k) loans come in handy when you’re purchasing a home you know will need renovations. When you get an FHA 203(k) loan, you can finance both the purchase price of your home and the renovation costs. And because it’s an FHA loan, you can qualify with a lower down payment and more flexible credit standards than most conventional loans. That means this government-backed FHA 203(k) mortgage can make homeownership more accessible while also boosting the property’s long-term value.

FHA 203(k) loans can also be used to refinance your mortgage for your current home to fund future renovations. Approximately 63% of homeowners prefer to remodel their home rather than move to an already renovated house, according to a survey conducted by Clever Real Estate. But renovating a home can be expensive—refinancing your current mortgage through a 203(k) loan can make it more possible.

We’ll cover everything you need to know about 203(k) loans, including who qualifies, what you can use the loan for, and how they compare to other renovation financing options.

What is a 203(k) loan?

A 203(k) loan is a kind of mortgage backed by the Federal Housing Administration that lets homebuyers or current homeowners cover both the cost of the property and its renovation in a single loan. Instead of applying for a traditional mortgage and then taking out a separate loan for remodeling, the FHA 203(k) loan combines both into one mortgage. 

This makes it especially attractive to buyers considering fixer-uppers or older homes that need major renovations. That said, you homeowners can also use a 203(k) loan to refinance their current home to fund renovations.

There are two main types of FHA 203(k) loans, each designed for different project sizes:

• Limited 203(k) loan: Ideal for smaller, non-structural renovations. With this option, renovation costs are capped at $75,000, making it best suited for cosmetic upgrades, such as painting, upgrading appliances, or replacing flooring.  
• Standard 203(k) loan: Perfect for major renovations, including structural changes. An FHA-approved consultant must oversee the project and ensure it meets all program requirements. 

What can an FHA 203(k) loan be used for?

As mentioned earlier, there are two types of FHA 203(k) loans. While both let you finance home renovations, the type of renovation you can do depends on which loan you choose. 

The standard 203(k) loan is for major home improvements and structural repairs. You can use a standard 203(k) loan to finance projects such as the following:

• Foundation repairs or replacements
• Converting a single-family home into a multi-unit property or vice versa
• Installing major systems such as new plumbing or electrical
• Connecting the home to public utilities like water or sewer
• Building home additions or expanding square footage
• Making accessibility improvements such as wheelchair ramps or widened doorways
• Major landscaping work

The limited 203(k) loan is for smaller updates that don’t involve structural work. Eligible projects include the following:

• Putting in new flooring or carpet
• Installing a new HVAC system
• Upgrading appliances
• Painting work
• Energy-efficient home improvements
• Septic system repairs or replacements
• Fixing minor safety hazards, like faulty wiring or broken steps

While the FHA 203(k) loan is flexible, there are restrictions. You can’t use it to finance luxury items or non-permanent features, like swimming pools, hot tubs, outdoor kitchens, saunas, satellite dishes, or barbecue pits.

Who qualifies for a 203(k) loan? Requirements and limits

Like any other mortgage, borrowers of 203(k) loans must meet specific minimum requirements to qualify. The eligibility criteria are very similar to those of a standard FHA mortgage, but with a few additional demands. Here are the 203(k) loan requirements:

• Credit score and down payment: Most lenders require a minimum score of 580 to qualify for the 3.5% down payment. If your credit score is between 500 and 579, you may still qualify, but you’ll need to put at least 10% down.
• Debt-to-income ratio: Lenders generally prefer your total monthly debts—including the future mortgage payment—not to exceed about 43% of your gross monthly income.
• Mortgage insurance premiums (MIP): You must pay upfront mortgage insurance, often 1.75% of the loan amount. There are also annual MIPs, ranging from 0.15% to 0.75% of the loan amount.  
• Occupancy: The property must be your primary residence. You can’t use a 203(k) loan to finance a vacation home, rental property, or an investment property.
• Renovation rules: You can only use a limited 203(k) loan to finance non-structural renovations not exceeding $75,000. On the other hand, a standard 203(k) loan is strictly for structural projects costing at least $5,000.
• Loan limits: How much you can borrow shouldn’t exceed the FHA loan limits in your area. You can look up the FHA limits in your area using this FHA mortgage limits tool.

FHA 203(k) loans vs. FHA construction loans

An FHA 203(k) loan is a mortgage type for buying an existing home and financing its repairs or renovations in one mortgage. In contrast, an FHA construction loan is typically used to build a brand-new home from the ground up. Construction loans often require higher credit scores, larger down payments, and are harder to qualify for than 203(k) loans.

Conventional home rehab loans vs. 203(k) loans

Conventional rehab loans function similarly to 203(k) loans but aren’t backed by the federal government. That means they may allow more flexibility with property types and loan amounts, but they usually have stricter approval standards. A 203(k) loan, on the other hand, is more forgiving, making it a popular option for buyers with modest credit or smaller savings.

Pros and cons of 203(k) loans

FHA 203(k) loans offer many perks but come with downsides you should be aware of before committing to this loan type. Weighing the pros and cons can help you decide whether it’s the right option for your needs or if you should explore other financing choices.

FHA 203(k) loan application process

Applying for a 203(k) loan takes more time than a traditional mortgage because the lender must review both your finances and your renovation plans. Here’s a step-by-step breakdown of the FHA 203(k) loan process:

1. Find a lender and get preapproved.

The process begins with pre-approval, where you work with an FHA-approved lender to determine how much you qualify for based on your credit, income, and debts. This will give you a clear budget to work with.

2. Find a property.

You’ll need to find a property that meets FHA guidelines and has renovation potential. Not every home will qualify, so it’s important to work closely with your lender and real estate agent to ensure the property meets the program’s requirements. 

3. Hire contractors.

Next, hire licensed contractors and get detailed bids for the renovation project you want completed. For a standard 203(k) loan, you’ll also need to work with an HUD consultant who will oversee the project and ensure everything complies with FHA rules.

4. Order an appraisal.

After your renovation plans are in place, an appraisal is ordered. Unlike a traditional appraisal, this one estimates the home’s value as-is and after repair. The lender uses this figure to decide how much 203(k) loan you can borrow.

5. Close on the loan.

Once approved, you’ll close on the loan and renovation begins. The lender will then place the renovation funds in an escrow account and disburse funds in installments as the work progresses. 

6. Do the final inspection.

When all improvements are complete, the project undergoes a final inspection. For standard 203(k) loans, the FHA consultant verifies the work was done according to the approved plans and meets FHA’s safety and livability standards. Once all improvements pass the final inspection, the renovation escrow is closed, and your FHA 203(k) loan continues as a standard FHA mortgage.

Common pitfalls to watch out for with FHA 203(k) loans

A 203(k) loan can help finance several renovation projects, but it’s not the best financing option for everyone. Here are the most common challenges to watch out for:

• Not every property will qualify: The FHA requires that the property meet strict safety and livability standards after renovations. If the house has issues that can’t be addressed within those guidelines or budget, the lender may not approve your loan.
• Budget overruns: Renovation estimates don’t always match the final cost. If the project ends up costing more than anticipated, you’ll likely have to cover the difference out of pocket. That's why having contingency funds is crucial.
• Inexperienced contractors: The FHA requires borrowers to hire licensed contractors, meaning you can’t DIY the project to save money. If you choose a contractor who isn’t familiar with FHA rules or doesn’t provide accurate bids, you could face delays and unexpected costs.
• Takes longer to close: Unlike traditional mortgages, 203(k) loans often take longer to close because of the additional paperwork, appraisals, and renovation planning involved.

Bottom line: Is an FHA 203(k) loan the right option for you?

For many buyers, especially first-time homeowners, a 203(k) loan offers a path to affordable homeownership while also financing much-needed renovations. This type of financing can be useful if you find a well-located but outdated home that wouldn’t qualify for a traditional mortgage.

However, the loan comes with extra requirements, mortgage insurance costs, and potential delays. If you’re considering a 203(k), weigh it against other options like an FHA construction loan, a conventional rehab loan, or home repair grants for people with disabilities.