FHA 203K Loan: How It Works, Benefits & Requirements

A 203k loan allows you to buy and renovate a home with one loan.

This program is ultra-popular because there’s simply no renovation loan that’s quite as affordable and lenient about qualification.

You can buy a home that no one else wants because it's ineligible for financing. Or, you can buy an outdated home and do a complete remodel, financing it all for 3.5% down.

How does an FHA 203K loan work?

Traditional home loans allow you to purchase the home as-is.

A 203k, rather, allows you to purchase and fix up the home.

You make an offer on the home, then work with a contractor to plan what work you want done and estimated costs.

The lender then finances the home purchase and construction costs with just 3.5% down for both. Considering most construction loans require perfect credit and 30-40% down, this is one of the most powerful yet underutilized programs in the U.S. housing market.

What’s more, these are "one-close" loans, meaning you don't have to take out a construction loan then refinance it later with a long-term loan, which is typical for other loans for major renovations.

Repairs are done after closing. You don’t have to convince the seller to let you do the needed repairs before the home is yours.

2024-2025 Changes to the 203K Program (Important! Read If Getting a 203K Before Nov. 2024)

In November 2024, the 203K loan is getting some major improvements. In this article, we will outline guidelines based on the new rules. If you purchase a home prior to November 2024, review this section for pre-update guidelines.

Maximum Limited 203K Repair Costs: Prior to November 2024, the maximum repair cost for the Limited program was $35,000. That will increase to $75,000 and will be reviewed annually to make sure it’s keeping up with inflation.

Consultant Fees: A consultant is required for a Standard 203K and optional for Limited. However, a consultant is advised for either program. As of November, you can wrap this fee into the loan amount for either program.

Rehab Timelines: The maximum allowed project timeline for the Limited 203K was increased from six to nine months. For Standard, it was increased from a six-month maximum to 12 months.

Mortgage Payment Reserves: You can finance up to 12 months of mortgage payments or the maximum time the home is uninhabitable due to renovations for the Standard program, up from six months.

Updated “Major Repair” Definition: Rehabs that displace the homeowner more than 30 days must be completed under the Standard program. The maximum was 15 days. This allows more projects to be completed under the Limited program.

What’s the difference between a Limited 203K and a Standard 203K?

The Limited 203K is for non-structural repairs and improvements. It’s a simpler process. A Standard 203K, also know as the “Full 203k”, can take care of major renovations including structural issues like moving load-bearing walls and building room additions.

Requirements for All 203K Loans

Following are guidelines for both the Limited and Full 203K

• 580-640 credit score, depending on lender

• 3.5% down on home price and rehab costs

• Maximum 50-55% debt-to-income ratio

• $498,257 loan limit, including repair costs (higher in designated high-cost areas)

• Upfront mortgage insurance premium of 1.75% of the total loan, including repairs

• Ongoing mortgage insurance of 0.55% of the loan amount per year ($46 monthly for every $100,000 borrowed)

• Primary residence only

• Single family residences. 2-4 unit properties acceptable when living in one unit

• The project can't displace the borrower for more than 30 days for the Limited program and 12 months for the Full 203K

• Open to U.S. Citizens, DACA recipients, eligible non-U.S. citizens

Limited 203K Requirements

Most homebuyers choose the Limited version because it requires less preparation, paperwork, and time. Additionally, more lenders offer the Limited version.

The Limited 203K funds can cover:

• The home purchase, construction and repair costs

• Inspection fees through the process, such as electric and plumbing inspections by the local housing authority

• Title fees and permits

• 203K consultant fees

The Limited 203K funds cannot cover:

• Mortgage payment reserves

• Architectural or engineering fees

• Feasibility study

Do I need a 203K Consultant for the Limited program?

FHA does not require a 203K consultant for the Limited 203K program. However, one can be extremely helpful in the planning process, and you can wrap this fee into the loan as of November 2024.

Eligible Limited 203K Projects

The Limited 203K can be used for a variety or purposes. The two most popular are bringing the home up to financeable condition and doing cosmetic repairs.

Here is an abbreviated list of eligible repairs:

• Projects with repair costs and contingency reserves under $75,000

• Cosmetic repairs like kitchen and bathroom remodels

• Repairing/replacing plumbing, HVAC, and electrical, septic

• Roof replacement

• Adding energy-efficient systems

• New appliances

• Fixing decks, patios, fences, walkways, and driveways

• Removing or repairing an existing in-ground pool

• Lead paint remediation

• Addressing most other non-structural safety concerns, including bringing the home up to HUD standards

• Most other small and less-involved improvements

Ineligible Limited 203K Projects

• Improvements costing more than $75,000

• Improvements expected to take more than nine months

• Structural work (moving walls, creating bedrooms etc.)

• Luxury improvements like new swimming pools and outdoor kitchen/barbeque areas

• Landscaping

• Converting a single-family to a multifamily

• Alterations to support commercial use

• Rehabs requiring more than two payments to each contractor

• Repairs that prevent you from occupying the property for more than 30 days

Standard 203K Loan Requirements

The Standard 203K loan is the “full” version of the program. You can complete major renovations including adding square footage and moving load-bearing walls. or There’s no dollar cap on improvements as long as the home price and repairs combined are within local FHA loan limits.

Eligible Standard 203K Projects

• All eligible Limited 203K repairs

• Structural repairs to bring the home up to HUD standards

• Home additions and finishing basements and attics

• Converting a single-unit property to a 2-4 unit home

• Adding a garage

• Repairing wells/septic systems or connecting to public water/sewage

• Roof, gutters, downspouts

• Landscaping

• Completely rebuilding a house, provided the foundation remains the same

• Moving a house to another location

Ineligible Standard 203K Projects

• New swimming pool, hot tub, spa, sauna, etc

• Outdoor kitchen areas/barbeques

• Tennis courts

• Photo murals

• Gazebos

• Alterations to support commercial use

• Repairs costing less than $5,000

Standard 203K Consultant Requirement

A consultant is required for the Standard 203K loan. The consultant:

• Estimates budgets and timelines

• Advises the buyer on the list of repairs needed or wanted

• Writes up a list of repairs to be completed

• Helps guide the project

The 203K Consultant costs between $1,000 and $2,000, depending on the repair budget. While it’s an extra cost, the 203K Consultant knows HUD rules makes sure the job is done correctly and that you’re completing the most important repairs. You can search for a 203K Consultant on HUD's website here.

Maximum FHA 203K Loan Amount

First, the maximum 203K loan, including all repair costs, must be within FHA county loan limits. You can check your county’s limits here.

In addition, the maximum loan is the lesser of:

• 96.5% of the total purchase price plus repair costs (3.5% down payment for both)

• 110% of the after-repair value

For example, you buy a $200,000 home and want $30,000 in upgrades. The max loan could be

• $230,000 X 96.5% = $221,950

If the appraiser estimates the home would be worth only $220,000 after repairs, the max loan would be

• $220,000 X 96.5% = $212,300

If your projected after-improved value is less than the purchase and repair costs, re-examine your repairs to make sure you’re getting the best ROI from each. Don't spend more than the home will be worth. That defeats the purpose of the 203K loan and you might as well buy a turn-key home.

Application Process for 203K Loan

1. Find a 203K lender: A lender should be experienced in 203K. Very few are. Ask how many 203K loans they’ve done in the past year

2. Get a 203K pre-approval: Know your maximum home price plus repair costs

3. Look for unwanted homes: Make low-ball offers on homes that no one else wants

4. Request a 75-90 day closing timeframe: These loans can take a long time to close. Some sellers won’t accept a 203K bid because they want to close in 30 days. That’s usually not possible

5. Request seller closing cost credits: A desperate seller will give you money for closing costs

6. Get an accepted offer: Submit the purchase contract to the lender.

7. Find a contractor: Ask your lender to recommend contractors in your area that have done 203k projects

8. Create a plan: For the Limited program, you can work up an informal document detailing your planned repairs. For Standard, your 203k Consultant will create the plan.

9. Get a rock-solid bid for repairs: The bid is an important piece of the loan and appraisal process. A bad bid will result in costly appraisal updates and delays. A final, set-in-stone bid is important early in the process.

10. Authorize an appraisal: The lender will order an appraisal that will estimate after-repair value.

11. Update financial documents: Submit new pay stubs, bank statements, and other personal financial documents to the lender if it’s been more than a few weeks since you were pre-approved.

12. Lender submits package to underwriting: When the appraisal is received, the whole file is submitted to the underwriter. This is the person responsible to review and make a decision on the loan and review the appraisal

13. Supply “conditions”: The underwriter will request additional items needed, or “conditions.” This could range from personal income and asset documentation to missing items on the bid and more.

14. Get a final approval: You’ll receive a “clear to close” from the underwriter when all conditions are met.

15. Loan funding: You will sign final loan documents and the lender will fund the loan, meaning the loan is complete and you own the home. The escrow company sets up an escrow account with the repair funds from which to pay the contractor.

16. Initial contractor pay-out: The escrow company issues funds to the contractor to start the project

17. Contractor completes the work: The contractor has nine months (Limited 203k) or 12 months (Standard 203k) to finish the project

18. Move-in: You have 60 days to move into the home once complete.

19. Enjoy your remodeled home: You now own a home that’s probably worth a lot more than your acquisition plus repair costs.

Benefits of 203K

• Expand homebuying options: Housing inventory is at record-low levels. Instead of looking for turn-key homes, go after homes no one else wants

• Instant equity: The as-repaired value is often much higher than the home price plus renovation costs

• Lower acquisition costs: You can buy a home at 80-90% of its true value simply because it needs work

• Less competition: Most homebuyers want a turn-key home, so there’s less competition for these homes, no bidding wars, and you can offer below asking price.

• Learn renovation management: You can get your feet wet as a home flipper or just learn how the renovation process works

• Buy the home and repair it with one loan: 203k covers both acquisition and repair costs

• No refinancing later: The 203k loan is a one-time close construction loan. You don’t have to take out construction financing, then refinance to permanent financing later

FHA 203K Loan vs. Other Options

Choosing a Lender

Not all lenders do 203K loans. Some can do them, but only do Limited 203Ks. Others don’t do the loans often enough to know the ins and outs. The 203k program is complex. It’s best to find a lender and loan officer that does a lot of them, or has a specific department in the company that handles them.

Ask how many 203K loans the loan officer and lender have done in the past year. If less than three, find a new lender.

Finding a 203K Contractor

FHA does not maintain a list of approved contractors. Any contractor that meets requirements and agrees to THE terms can do the work. Generally, the company must provide:

• Their contractor’s license

• Insurance

• Bond

• References from past customers

• Work experience (description of last few jobs)

• An accurate bid

Ask your lender to refer you to some companies. Many contractors will not take on 203K projects because there is more paperwork involved, extra inspections, and bid corrections. (The bid must contain many elements and be fully accurate, as we’ll discuss next).

If you find your own contractor, tell them upfront that you are using a 203K loan. Make sure they understand the extra requirements and can complete the job on time.

The 203K Bid

Most contractors will have a hard time putting together a bid that meets all requirements the first time. Before you have them work up the bid, ask your lender for a list of elements that need to be on it. Many lenders will require:

• Contractor’s name, address, phone number, and license number

• Buyer’s name and property address

• A statement that work will begin within 30 days of loan closing and completed within the allotted time for the program, and that the borrower will not be displaced more than 30 days if using the Limited 203K

• Acceptance of payouts based on project progress

• Labor, materials, permits, and tax broken out on separate line items on the bid

• Bottom line bid amount must match the 203K Owner/Contractor agreement

• Buyer and contractor signature and date

Make sure you are 100% decided on the repairs you want to do. Changing your mind mid-process will require a new bid and new appraisal (more on that below).

For a Limited 203K, have just one contractor for the entire job. If you have more than one, each contractor will have to supply a bid that meets the above requirements.

How the Bid Affects the 203K Appraisal

The appraiser will use the final bid to perform the appraisal. The appraiser will note the “cost basis” of the home after repairs, or how much it cost to buy and repair the home. If the bid is inaccurate, the appraisal will be, too.

To avoid expensive and time-consuming appraisal fixes, get an accurate and final bid before authorizing the lender to order an appraisal.

Is an FHA 203K Loan a Good Idea?

An FHA 203K loan is a fantastic idea for the right homebuyer. Someone who wants to build instant equity and doesn’t mind more legwork is a great candidate. However, someone who needs a quick closing and less hassle should avoid the program.

FAQs

Can I refinance my FHA 203K loan?

Yes, you can refinance your FHA 203K loan using the FHA Streamline program, or refinance into another loan type like a conventional loan. However, you don’t have to refinance. You can keep the same loan you used initially.

Can I refinance into an FHA 203K?

Yes. You can use a 203K loan to refinance, paying off your existing loan and taking extra funds to complete repairs.

What is a contingency reserve for a project?

FHA requires the lender to collect a “contingency reserve” for most 203K projects. The amount will be between 10-20% of the construction budget. Its purpose is for unforeseen cost overruns. If you don’t use this money, it’s returned to you. The contingency reserve reduces the maximum dollar amount of your Limited 203K project. For example, a 10% contingency reserve means your maximum project could be about $68,000 ($68k X 110% = $74,800). A reserve is a good thing, though. If the project costs more than planned, you don’t have to come up with money out-of-pocket.

Is there a downpayment for the 203K loan?

The down payment is 3.5%, typically based on the home price plus repair costs. If the home is $250,000 and the repairs are $50,000, you would need a down payment of $10,500.

Can I get an FHA loan for an investment property?

No. The property must be your primary residence, including for the 203K program.

Can I use a 203K loan for purely cosmetic fixes?

Yes. The home can be financeable and still use a 203K loan to remodel and modernize the home.

What is a Streamline vs Limited 203K?

A Streamline and Limited 203K are the same thing. HUD changed the name from “Streamline” to “Limited” a few years ago. If you see information online about a “Streamline 203K”, it's referring to the Limited program.

What is a Limited 203K loan vs Full 203K loan?

A Limited 203K allows you to do non-structural repairs costing less than $75,000. A Full (Standard) 203K allows structural fixes up to and including rebuilding an entire home using the existing foundation. There is no maximum dollar limit for a Full 203k.

Is there a minimum repair cost for the Limited 203k?

There is no minimum repair cost, but you might use FHA Repair Escrow or pay cash after closing for repairs under $5,000. The 203k comes with extra fees and paperwork you can avoid if you don’t need the program.

What if my repairs are over $75,000 for a Limited 203K?

Your repairs have to be around $65,000-67,000 for you to be under the $75,000 maximum for the Limited 203K due to extra fees and reserves. If you are over, you will have to either remove planned repairs or switch to the full Standard 203K. Using a Standard 203K will require much more paperwork and time, and you may have to switch lenders.

Do I need a consultant for a Limited 203K?

You do not need a consultant for a Limited 203K. You do for Standard. You might choose to use one for either loan, since they help guide the complex process.

Get Approved for FHA 203K

This loan can give you access to a wider range of homes. It’s the perfect tool when there are no turn-key homes on the market, or when you just want to get a great deal on a home.