An FHA 203(k) home loan is backed by the U.S. Federal Housing Administration that allows a borrower to take out a loan for two purposes; home improvements and home purchases, if the home will be the mortgagor’s primary residence.
“Section 203(k) insurance enables homebuyers and homeowners to finance both the purchase (or refinancing) of a house and the cost of its rehabilitation through a single mortgage or to finance the rehabilitation of their existing home,” according to HUD.
Explaining How an FHA 203(k) Home Loan Works
An FHA 203(k) home loan helps lower-income American families purchase and renovate homes that are in older communities or that are in need of heavy repairs. The program also allows the cost of purchasing, refinancing and renovating a new primary home to be rolled into a single fixed or adjustable-rate mortgage instead of being separated into multiple repayments. The amount borrowed will include the purchase price of the home but also the cost of renovation including labor costs, materials, and other additional fees.
If temporary housing is required while the property is being renovated to a livable standard, then the loan may also include funding to cover these expenses. This includes rent while the purchased or renovated house in question does not meet livable standards. Thanks to the dual-purpose nature of an FHA 203(k) loan, the borrower does not need to make multiple applications for mortgage or renovation costs and can roll all expenses into a single loan. This reduces the chances of one of the loans being rejected by a bank and also reduces the overall cost of the repayment including interest.
There are two types of FHA 203(k) loans available, limited and standard.
- 203(k) limited loan: Up to $35,000 for renovations with the exception of structural repairs that are not eligible under this loan.
- 203(k) standard loan: Renovations must cost at least $5,000 in order to qualify and includes major structural repairs. Borrowers using a 203(k) standard loan must hire a HUD consultant during the renovation process.
In addition, the funds granted by an FHA 203(k) loan must be included in an eligible list of projects. Therefore, luxuries such as an outdoor office, a swimming pool or an underground gym are not eligible projects. Improvements paid for with a 203(k) loan must also be completed by a licensed contractor and must be approved by an FHA appraiser. In some cases, a HUD consultant may also be involved to ensure that the funds are being used correctly.
The eligible list of projects for an FHA 203(k) loan includes:
- Dealing with potential health and safety hazards.
- Replacing plumbing and sewer systems.
- Installing or repairing the roof and gutters.
- Installing or replacing flooring.
- Improving a home’s functionality.
- Adding attractiveness to a home.
- Landscaping around the home.
- Improving access for those with a disability.
- Improving the energy efficiency of a home.
A fully-defined list of eligible activities is available on the HUD website.
Qualifying for an FHA 203(k) Home Loan
A 203(k) loan is an FHA mortgage and is subject to FHA loan limits.
- Maximum loan amount: FHA loan limits vary depending on your location. The general cap is currently at $314,827 in low-cost counties and up to $726,525 in high-cost counties.
- Credit score: A credit score of at least 500 is needed to qualify for an FHA 203(k) loan. Some lenders may have a higher minimum.
- Down payment: The minimum down payment for a 203(k) loan is 3.5% if your credit score is 580 or higher. Between 500 and 579, a down payment of 10% is required. Assistance for the down payment may be available through state homebuyer programs, and monetary gifts from family and friends are also permitted to help pay for it.
- Foreclosure: A foreclosure within the past three years will likely prevent you from being eligible for an FHA loan.
Benefits of an FHA 203(k) Loan
The benefits of an FHA(k) home loan include:
- A convenient way to roll renovation and mortgage costs into a single loan.
- Low minimum down payment of 3.5% with a qualifying credit score.
- Lenient qualifications compared to a conventional loan.
- Access to purchase homes that are listed at a lower price due to their condition.
- Upgrade or renovate your existing home to make it more appealing and functional.
Marimark Mortgage is based in Tampa, Florida and serves the mortgage needs of the luxury real estate market in Florida, Virginia, and Pennsylvania.
We specialize in conventional home mortgages, FHA, VA, and USDA mortgage options, refinance loans, and reverse mortgages. We’ve worked extensively with cash-out refinancing, and help clients with HARP refinancing to lower their monthly mortgage payments.