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FHA 203(k) Loan: Your Ticket to a Fixed-Up Fixer-Upper

An FHA 203(k) loan, also known as a mortgage rehab or renovation loan, lets you buy and fix up a home with a single mortgage. It’s perfect for those eyeing a fixer-upper, rolling both the purchase and renovation costs into one loan.

How Does It Work?

These loans cover both material and labor costs for renovations. Since they’re insured by the government, they often come with more flexible requirements than conventional loans. 

When you make an offer on a fixer-upper home, your 203k approved contractor submits his bid to the lender for the work you want done. The lender sends out an appraiser to provide the FUTURE value of the home AFTER the contractor’s work is done. That future value needs to be high enough to cover the cost of buying the home AND the cost of the upgrades. If it comes out even higher than that, congrats, you’ve created equity.

Key Points:

  • Starting the Work: Renovations must start within 30 days of closing and be completed within six months.

  • Loan Repayment: You’ll repay the loan over time through regular mortgage payments.

  • Flexible Terms: These loans often have more lenient borrower requirements.

  • Lenders will require you to work with a 203k approved contractor. 

  • No, they do not send you the rehab money directly; it is sent to the approved contractor.

Types of FHA 203(k) Loans

Streamline 203(k) Loan: Ideal for smaller projects, allowing you to borrow up to $35,000 for repairs. It doesn’t cover major structural work.

Standard 203(k) Loan: Suitable for larger projects over $35,000. Requires a minimum of $5,000 for renovations and oversight by a HUD consultant.

Eligible Uses

You can use an FHA 203(k) loan for various home improvements:

  • Enhancing curb appeal

  • Roofing and flooring repairs

  • Energy efficiency upgrades

  • Addressing health and safety hazards

  • Improving accessibility

  • Plumbing and septic system overhauls

Ineligible Uses

Luxury items like swimming pools, hot tubs, and outdoor fireplaces aren’t covered. The loan focuses on functional and aesthetic improvements.

Pros and Cons

Pros:

  • Lower credit score and down payment requirements

  • Combines home purchase and renovation into one loan

  • Competitive interest rates

Cons:

  • Upfront mortgage insurance premium (MIP)

  • Must be a primary residence

  • Not available for investment properties

  • Potential need to work with a HUD consultant

Comparing to Conventional Rehab Loans

Conventional rehab loans may allow for more luxurious updates but often have stricter credit and down payment requirements. It’s essential to compare different loan options to find the best fit for your needs.