Purchasing a home usually requires some degree of renovation, but those who opt for an extreme fixer-upper should be prepared to invest in numerous projects.

If you are in this scenario, then an FHA 203(k) loan may be the answer for you. More commonly referred to as a mortgage rehab loan or Section 203(k), these loans provide financing for both your home’s purchase and any remodeling or repairs that need to be done all in one package deal.

What Is An FHA 203(k) Loan?

An FHA 203k loan is an attractive option to consider when looking for a home mortgage. This particular product, backed by the Federal Housing Administration, allows buyers to borrow money that covers both the cost of purchasing a property as well as any necessary repairs and labor needed – up to six months worth of mortgage payments can be included in certain instances! It’s important to remember though that while the FHA does not provide funds directly, they do offer all lenders financial protection should they choose this type of rehab loan.

Understanding How An FHA 203(k) Loan Works

Financing your renovation project can be done through a 203(k) loan, which offers homeowners the option of either a 15- or 30-year fixed rate mortgage, as well as an adjustable-rate mortgage (ARM).

When it comes to borrowing, the FHA 203(k) renovation loan for 2022 requires a down payment of 3.5% or 10% if your credit score is lower than 580. Not only that, but depending on several criteria like income and credit rating, there are limits set by the Federal Housing Administration in which you can borrow from through this type of loan. With an FHA 203(k) renovation loan you’ll get access to needed funds for renovations while also taking advantage of low interest rates based on where the property is located. Generally, the amount you can borrow for your loan will be based on whichever of these is lowest::

  • The FHA’s maximum loan limit for the county where the property is located
  • A calculation involving the home’s “before” value plus improvement costs
  • A calculation involving the home’s “after” value, including the improvements

In most cases, a licensed contractor is the one responsible for renovations but if you want to do all or some of them yourself, it can be possible. In this instance, however, you need permission from your lender first.

If you’re considering the purchase of an older home, a 203(k) loan could be a great choice; however, if your property is relatively new and its renovations aren’t estimated to cost at least $5,000 then this type of loan might not suit your needs.

The Two Types Of FHA 203(k) Loans

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

  • Limited 203(k): The 203(k) loan provides a simpler application process for projects valued at less than $35,000. There is no minimum cost requirement; however, structural repairs are not eligible to be paid with this type of loan.
  • Standard 203(k): If you’re looking for a loan to fund an extensive project over $35,000 – like structural changes or full home renovations – the 203(k) loan is ideal. The Standard 203(k) has a minimum loan amount is $5,000 and must obtain architectural exhibits as well meet building code requirements.

2023 Loan Qualifications For A FHA 203(k) Loan

The main restriction for an FHA 203(k) loan is that the borrower has to be the owner or occupant. Investors are not eligible for this kind of loan, although in certain situations, nonprofit organizations may be allowed to obtain one. Other qualification criteria include:

  • A minimum credit score of 500 or higher
  • 3.5 percent minimum down payment or 10 percent if your credit score is below 580
  • 50 percent maximum debt-to-income (DTI) ratio if your credit score is at least 580

To be eligible, the project must also abide by certain energy-efficiency and structural standards.

How To Use FHA 203(k) Loans

With an FHA 203(k) loan, there are certain restrictions to adhere to. Depending on the project’s size and scale, all construction must be completed within a six-month period following closure. All renovations should focus strictly on structural changes, reconstruction efforts that may modernize or improve the home’s functional purpose can also be eligible.

When you hire a contractor, it is essential to make sure they are familiar with 203(k) loans and their related payment schedule as well as requirements. Before selecting the right individual for your project, make sure to inquire about prior experience with this type of loan.

After the completion of your renovations, a letter is required from you as the borrower. To ensure that all work has been done as specified and in compliance with HUD standards, an evaluation will be conducted by a HUD-approved consultant. The consultant can be found either through your lender or on the FHA website.

Types Of Repairs That Are Acceptable

A standard 203(k) loan can cover many projects. This is a partial list:

  • Structural alterations and reconstruction
  • Modernization and improvements to the home’s function
  • Elimination of health and safety hazards
  • Changes that improve appearance and eliminate obsolescence
  • Reconditioning or replacing plumbing (for example, installing a well and/or septic system)
  • Adding or replacing roofing, gutters and downspouts
  • Adding or replacing floors and/or floor treatments
  • Major landscape work and site improvements
  • Enhancing accessibility for a disabled person
  • Making energy conservation improvements

Types Of Repairs That Are Not Eligible

If you’re looking to finance a 203(k) loan, certain properties such as cooperatives are ineligible. On the other hand, mixed-use buildings with both residential and commercial components may qualify if your renovation plans only involve making improvements for residential purposes.

203(k) financing is not available for projects that do not result in the home’s actual improvement or aesthetics. You cannot use a 203(k) loan to cover any spending unless it benefits the dwelling substantially.

Here are a few examples that would not be eligible:

  • Swimming pool
  • Hot tub
  • Tennis court
  • Barbecue pit
  • Outdoor fireplace
  • Satellite dish

The Costs Involved In An FHA 203(k) Loan

The final expenses associated with a FHA 203(k) loan are usually equivalent to other home loans and refinancing processes, ranging between 2-6% of the sale price. Nevertheless, some lenders could charge additional fees for this particular form of financing.

The Federal Housing Administration sets the regulations for which closing costs may be taken care of by the borrower. All other expenses are typically not allowed and must be shouldered either by the seller or lender if you’re refinancing an already existing loan.

Here are some expenses you can expect to pay:

  • Lender origination fee
  • Appraisal and inspection fees
  • Title insurance and title search
  • Credit report check
  • Property survey

With a 203(k) loan, you must pay an upfront mortgage insurance payment of 1.75 percent of the total loan amount which can be incorporated into your financing. In addition to that, you are required to make monthly mortgage insurance payments based on your LTV ratio and length of the mortgage term.

The Pros And Cons Of FHA 203(k) Loans

When considering an FHA renovation loan, it is important to consider the pros and cons in order to make an informed decision.


  • One loan for both purchase and renovations
  • Low minimum down payment requirement
  • Relatively low credit score requirement
  • Potentially lower interest rates compared to personal loans, credit cards or other home improvement loans
  • Covers mortgage payments if the home can’t be lived in during renovations


  • FHA mortgage insurance required
  • Rates may be higher compared to conventional loans
  • Process may require meeting with a 203(k) repair consultant
  • More extensive repairs require more paperwork
  • Potential for the additional cost of architectural assessments
  • Property must be your primary residence

Finding An FHA 203(k) Loan Lender

To get a 203(k) loan, you must look for an FHA-approved lender. HUD’s lender list facilitates this process by allowing users to search for approved lenders near them offering these loans. As the application and qualifying requirements of a 203(k) can be intricate, it is important to ensure that the lender selected is knowledgeable and experienced with FHA loans.

The FHA 203(k) Loan Refinancing Process

FHA 203(k) loans offer a unique opportunity for homeowners to both buy and improve pre-existing homes. The refinancing process into this loan is similar to regular refinance but with the addition of certain specifications that need to be met in order to qualify. With an FHA 203(k) loan, you can make your dream home come true!

Upon refinancing, a portion of the 203(k) funds will be used to pay off your current mortgage while the remaining amount will be held in escrow until all repairs have been completed. If you already have a 203(k) mortgage, don’t forget to consider the FHA streamline program for your refinancing needs. You may be able to get an even lower interest rate!

Contact Sword Mortgage To Learn More

At Sword Mortgage, we believe that an informed customer is the best kind of customer. Therefore, our loan officers will take the time to fully explain your options and help you understand all aspects of your unique situation before making a decision. Call (770) 757-5750 to speak to a mortgage professional or get started on your loan application process today.