Mortgages & Home Loans Financing Your Home Purchase What Is an FHA 203(k) Loan? FHA 203(k) Loans Explained By Justin Pritchard Justin Pritchard Facebook Twitter Website Justin Pritchard, CFP, is a fee-only advisor and an expert on personal finance. He covers banking, loans, investing, mortgages, and more for The Balance. He has an MBA from the University of Colorado, and has worked for credit unions and large financial firms, in addition to writing about personal finance for more than two decades. learn about our editorial policies Updated on May 11, 2022 Reviewed by Doretha Clemon Reviewed by Doretha Clemon Doretha Clemons, Ph.D., MBA, PMP, has been a corporate IT executive and professor for 34 years. She is an adjunct professor at Connecticut State Colleges & Universities, Maryville University, and Indiana Wesleyan University. She is a Real Estate Investor and principal at Bruised Reed Housing Real Estate Trust, and a State of Connecticut Home Improvement License holder. learn about our financial review board Share Tweet Pin Email In This Article View All In This Article Definitions and Examples of FHA 203(k) Loans How FHA 203(k) Loans Work Is an FHA 203(k) Loan Worth It? Definition An FHA 203(k) loan allows you to use one loan for home improvement and a home purchase. You can also use these loans just for home improvements, but there might be better options available. Photo: The Balance Definitions and Examples of FHA 203(k) Loans FHA 203(k) loans make it possible for people to rehabilitate properties that need some help and turn them into homes. Sometimes the location is good and the property has potential, but you need to make a few significant improvements. Without those repairs, the home might not be suitable for living, and lenders might be unwilling to fund loans on a property with problems. These loans give homebuyers an incentive to take such properties off the market and make them a valuable part of the community again. For example, say you're buying your first home and you're looking for a first-time homebuyer rehab loan. You can apply for a 203(k) loan to make the purchase and rehab the house. How FHA 203(k) Loans Work FHA 203(k) loans are guaranteed by the Federal Housing Authority (FHA), which means lenders take less risk. As a result, it may be easier to get approved (especially with a lower interest rate). Fund Repairs and Purchase You can borrow enough to purchase a home, plus additional funds to make necessary improvements. Because the FHA insures the loan, lenders are more willing to move forward with a property they might not touch otherwise. For this reason, 203(k) loans are a good fit for those who want a first-time homebuyer rehab loan but are anxious about loan approval. Pay for Temp Housing Unless you want to live in a construction zone, you’ll need funds for other housing arrangements. In some cases, you may be able to borrow funds to help cover the mortgage payments on a property that you can't occupy for up to six months. Project Overview Funds go into an escrow account and are paid out to contractors as the work is completed. It’s essential to work with reputable contractors who don’t underbid and who are familiar with the 203(k) process. Eligibility Owner/occupants and nonprofit organizations can use FHA 203(k), but not investors. The program is designed for one- to four-unit properties, but condo and townhome owners can use the program for interior projects. You don’t need perfect credit, but as with almost any loan, you need sufficient income to cover the payments. Note It’s best to have a debt-to-income ratio better than 31/43, but you might be able to go higher. Depending on the specific improvements you have in mind, other types of loans might be a better fit. For environmentally sustainable projects (like upgrades to energy-efficient heating and cooling systems), a Property Assessed Clean Energy, or PACE, loan can also provide funding. PACE is available for commercial properties, as well. Loan Details You must borrow at least $5,000 for a standard loan, and there are maximum limits set by the FHA that vary by location. For most people buying a single-family home, that is not extravagant, and most projects should fall within those limits. For smaller projects, the Limited FHA 203(k)—previously under the name Streamline 203(k)—allows you to borrow less with an easier process. Note You can borrow enough to finance 110% of the home’s projected value after improvement. Appraisers will review your plans and take the future value of your home into account. Interest Rate The interest rate varies, depending on rates in general and your credit. Expect to pay fees somewhat higher than what you’d pay on a standard mortgage loan. Think of this as the cost of easier approval (or bundling both your purchase and improvement loans into one). Plus, lenders perform extra work, like tracking the progress of your project and handling payouts. At the same time, the loan is insured by the FHA, so lenders might offer a lower rate than you’d qualify for elsewhere. Compare offers, and get the loan that works best for you—203(k) loans can be either fixed-rate or variable rate loans with repayment up to 30 years. Down Payment With the 203(k) loan, as with other FHA loans, you can pay as little as 3.5% upfront. However, there are several good reasons to make a bigger down payment whenever you can. Doing so can reduce your interest costs and keep monthly payments to a minimum. Contractors and DIY With 203(k) loans, you have the opportunity to make significant improvements to your home. You also get to choose projects that matter most to you: If you want to use green or energy-efficient appliances and materials, you’re free to do so. You can’t fund luxury items through 203(k), but you can make dramatic improvements. Enjoy hands-on projects? You may be disappointed to hear that the program could prevent you from doing the work yourself. Even if you are a skilled, licensed contractor, you might not be able to complete all of the work. You must use licensed contractors for all work, and it’s important that they know you’re using 203(k). That could rule out local contractors you’ve used in the past, and with whom you have developed a relationship. The 203(k) process is all about paperwork and following specific rules, so brace yourself for less freedom than you might have imagined when remodeling your home. Note If you're an investor hoping to flip houses, there are probably better options, including sourcing money from private lenders. Is an FHA 203(k) Loan Worth It? A 203(k) loan is great for improving a property in which you hope to live, and it could be a good option if you're looking for a first-time homebuyer rehab loan. However, there are always downsides to any financing option. Cost FHA 203(k) loans might or might not be your most affordable option. You must pay an upfront mortgage insurance premium (MIP), and you also pay a small ongoing fee for each monthly payment. Your lender may also charge a “supplemental origination fee” to earn additional revenue for processing your loan. Other, non-203(k) lenders will also charge fees. As a result, it’s best to gather quotes from several sources (looking at several different types of loans) before you make a decision. Paperwork These loans are notorious for paperwork. You’ll fill out numerous forms, and your contractors are also subject to some of this pain. If you don’t have the patience to follow through on everything, consider other options. Time In addition to the time it takes to deal with paperwork, you’ll have to wait for answers from the FHA and your lender. They’ve got just as much (or more) paperwork to do on their end. Especially if you’re trying to buy a property in a competitive market, this can be a dealbreaker. Required Standards You might have certain improvements in mind, but the FHA also requires that you deal with health and safety issues and meet all building codes. Lead paint, electrical problems, and other items may be added to your project list unexpectedly. Dealing with those issues is probably a good idea anyway, but you have less choice on when and how to fix those problems. Key Takeaways FHA 203(k) loans encourage taking homes off the market that might not be suitable for living and making them a valuable part of the community again.Owner/occupants and nonprofit organizations can use FHA 203(k) for one- to four-unit projects, but these loans aren't available to investors.203(k) loans are backed by the FHA, so you can put as little as 3.5% down, but interest rates can vary and you must borrow at least $5,000.The contractors you use must be licensed and should be familiar with the 203(k) process and paperwork. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Department of Housing and Urban Development. "203(K) Mortgage Rehab Insurance." Department of Housing and Urban Development. "FHA Single Family Housing Policy Handbook," Page 578. Department of Housing and Urban Development. "FHA Single Family Housing Policy Handbook," Pages 392-396. Department of Housing and Urban Development. "FHA Single Family Housing Policy Handbook," Page 374. Department of Housing and Urban Development. "FHA Single Family Housing Policy Handbook," Page 368. Department of Housing and Urban Development. "FHA Single Family Housing Policy Handbook," Page 367. Department of Housing and Urban Development. "FHA Single Family Housing Policy Handbook," Page 179. Department of Housing and Urban Development. "HUD HOC Reference Guide: Debt-to-Income Ratio." Department of Energy. "Property Assessed Clean Energy Programs." Department of Housing and Urban Development. "FHA Single Family Housing Policy Handbook," Page 391. Department of Housing and Urban Development. "FHA Single Family Housing Policy Handbook," Page 227. Department of Housing and Urban Development. 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