Home » Learn » Loan Types » FHA 203(k) Rehab Loans

FHA 203(k) Rehab Loans

Have you fallen in love with a home that has great potential, but it needs some (or a lot) of TLC? FHA 203(k) rehab loans are two among several types mortgage rehabilitation loans (a.k.a. renovation loan) that can help you buy a fixer-upper and finance the improvements with one loan. You can also use this loan to refinance your property and fund the cost of renovations. This rehab loan is backed by the government, specifically the Federal Housing Administration (FHA). If you are a “do it yourself” buyer, be aware that there are restrictions with this loan as to who can do the work.

Robert Harris

February 1, 2022

New private housing development construction in rural countryside aerial view

Basic Facts about FHA 203(k) Rehab Loans

Fixed rate or adjustable; 15- or 30-year terms
Requires upfront Mortgage Insurance Premium (MIP)
Must be primary residence for at least 12 months
Multi-family Units: Yes, but limited to 4 units (owner must live in one of the units for 12 months)
Covers materials and labor for renovations

Insured by the government
More flexible terms and qualification standards than conventional loans
There are FHA limitations and restrictions on the amount, types, and costs of rehabilitation
Renovations must start within 30 days of closing and be completed within six months
Renovations and repairs done by contractors (DIY with restrictions)

Two Types of FHA 203(k) Rehab Loans

Streamline FHA 203(k) Loan:

This is a limited loan. It does not allow for structural changes (i.e., load bearing walls or adding rooms) and offers a maximum of $35,00 for renovations. There is no minimum cost. Permitted renovations include replacing carpet and flooring, remodeling kitchen and baths, making the home more energy efficient to name a few. This is ideal for someone who qualifies for an FHA loan but finds a house that won’t qualify as-is.

Standard FHA 203(k) Loan:

This loan is for larger jobs and covers major structural repairs that can exceed the $35,000 limit of the streamline loan. There’s a minimum renovation cost of $5,000. You must hire a HUD (Housing and Urban Development) consultant to oversee the renovation project. There are rule and guidelines for compliance with government code. The work done on these properties can range from landscape and curb appeal to structural. There are limitations which include pools, hot tubs, complete tear downs and rebuilds.

Loan Requirements

Must work with FHA-approved lender
Minimum credit score of 500
Minimum down payment of 3.5% for credit score of 580 or above; 10% down for anything lower
Maximum housing expense of 31% and overall DTI of 43% is preferred, but it may vary.

As with any loan qualification, the lender looks at the whole picture. If your credit score is higher, you may be able to obtain a loan with a DTI that’s higher than 43%. The higher your credit score the lower your down payment may be.

Advantages

Allows you to combine real estate costs and renovation expenses into one loan

Lower credit score threshold
Low down payment
Able to refinance FHA 203(k) loan
Comparable interest rates
Can be used for multi-family rental income if owner live there too

Disadvantages

This is not for serial investors
Application and paperwork process is more involved
Upfront and annual Mortgage Insurance Premium is required

Project restrictions including use of HUD consultant to oversee renovations

Summary

If you have your eye on a fixer-upper, this may be the loan for you. If you have a lower credit score, then the FHA rehab loans may be easier to get than a conventional loan. Although this isn’t a loan for investors and house flippers, renovating your home can add value and make you money in the long run. If you choose this loan program, be prepared for paperwork and the staying on top of the renovation requirements.

Ready to apply?

NMLS #1743685

Quick Links

Information

Contact

Subscribe in a reader