The Ultimate Guide to the FHA's Renovation Loan

The Ultimate Guide to the FHA’s Renovation Loan

An FHA 203(k) loan is a government-backed, permanent mortgage used to purchase and renovate a primary residence. A Federal Housing Administration (FHA) 203(k) loans are exclusive to owner-occupied purchases and renovations and are not suitable for real estate investors looking for renovation financing. Investors who are interested in rehab projects should instead read our guides on rehab loans and fix-and-flip loans.

If you’re don’t need money for renovations, then traditional mortgage will be a better fit. Getting a great mortgage for your rental property has never been easier. Fill out a short form on LendingTree and let multiple lenders compete for your loan. Their online marketplace enables you to compare rates, offers, and find a good fit quickly. Take a few minutes and see your options.

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What Is an FHA 203(k) Loan?

An FHA 203(k) loan is a long-term, owner-occupied renovation mortgage backed by the federal government. FHA 203(k) loans help borrowers purchase and renovate a primary residence between one and four units. Renovation costs are wrapped into the mortgage as a single loan. The total loan amount is typically equal to the purchase price plus the total estimated cost of repairs.

FHA 203(k) loans are a unique type of FHA loan in that they allow for the purchase and renovation of a residential property under a single loan. Typical loan terms are between 15 and 30 years, making it a long-term renovation option for homeowners.

Who Are FHA 203(k) Loans Right For?

FHA 203(k) loans are therefore right for two specific types of individuals:

  1. New homeowners looking to purchase and renovate their first primary residence
  2. Existing homeowners looking to purchase and rehab a new primary residence

FHA 203(k) loans can be used to finance the purchase and renovation of the following owner-occupied properties:

However, FHA 203(k) loans have strict qualifications, making it harder for approval when compared to a hard money loan. Specifically, borrowers should expect to have the following when applying for an FHA 203(k) loan:

  • Owner-occupied property between one to four units
  • 640 minimum credit score (check your credit score here for free)
  • 45% DTI ratio

New homeowners most commonly use FHA 203(k) loans for the purchase and renovation of their first primary residence. Existing homeowners can also use an FHA 203(k) loan to purchase and renovate a new primary residence if they’re selling their old home and moving.

Remember that an FHA 203(k) loan isn’t suitable for an investor looking for renovation financing. If you’re a rehab investor or if you don’t meet the FHA 203(k) loan qualifications above, you’ll want to check out the following articles: rehab loans and fix-and-flip loans.

Conventional FHA 203(k) Loans vs Streamlined FHA 203(k) Loans

There are two types of FHA 203(k) loans available to homeowners looking to purchase and renovate a primary residence between one to four units:

  • Conventional FHA 203(k) loans
  • Streamlined FHA 203(k) loans

Both conventional and streamlined FHA 203(k) loans finance the purchase and renovation of a home together as a single loan. However, there are a few differences between the two types of FHA 203(k) loans. The major differences include:

  • Conventional FHA 203(k) loan:
    • Renovation financing up to 50% of purchase price
    • Renovation financing requires between a 10% to 20% contingency reserve for unseen rehab costs
    • A licensed contractor must oversee all renovations
    • Structural changes allowed
  • Streamlined FHA 203(k) loan:
    • Renovation financing up to $35,000
    • Renovation financing can include a contingency reserve between 10% to 20%, but it isn’t required
    • Allowable DIY rehab projects under $15,000; all other projects must be overseen by a licensed contractor
    • No structural changes allowed

Let’s take a minute to review each of these 203(k) loans in more detail.

Conventional FHA 203(k) Loans

Conventional FHA 203(k) loans are long-term financing options used by homeowners looking to purchase and renovate an owner-occupied primary residence between one to four units. Conventional FHA 203(k) loans can finance the home purchase and renovations up to 50% of the purchase price together as a single loan. Renovations can be both structural and cosmetic.

This means that conventional FHA 203(k) loans are best for the purchase and renovations of an owner-occupied primary residence in poor condition. After the initial purchase, FHA 203(k) loans require that renovations are carried out using the following timelines:

  • Renovations must start within 30 days of purchasing a property
  • Renovations can’t last for longer than six months

To help ensure you stay on budget and within the time allotted, conventional FHA 203(k) loans include the following:

  • 10% to 20% contingency reserve for unseen renovation costs, included as part of the overall renovation budget equal to 50% of the purchase price.
  • Up to six months’ worth of mortgage payments if renovations require the homeowners to live elsewhere during construction.
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Conventional FHA 203(k) loans are issued by mortgage lenders with an FHA license. Borrowers should, therefore, expect to put between 3.5% to 20% of the loan as a down payment. We discuss loan amounts, rates, costs, and terms in the section below.

Conventional FHA 203(k) lenders typically first issue funds for the initial purchase of a primary residence. From there, lenders put the renovations funds into an escrow account, reimbursing borrowers periodically for renovations. This means that borrowers typically have to cover the upfront costs of the rehab and submit invoices to the lender, who then issues renovation funds in stipends or “draws.”

Conventional FHA 203(k) loans can finance renovations up to 50% of a property’s purchase price. Renovations can include the following:

  • Structural changes, such as removing a load-bearing wall
  • Cosmetic changes, such as new flooring, a kitchen remodel
  • Energy-efficient upgrades like solar power or new windows
  • Plumbing and electrical

However, conventional FHA 203(k) loans can’t finance luxury items such as a pool. All renovations are required to be overseen by a licensed contractor and lenders typically require a third-party inspection after the rehab is complete.

This is one of the reasons why FHA 203(k) loans aren’t right for rehab investors. Real estate investors typically want to control the overall renovations. There are other loan options, such as a hard money loan, that allow investors to manage their renovations fully and are more suitable for their needs.

When it comes to finding and renovating a home with a conventional 203(k) loan, Tracy Slowik, a broker and acquisition specialist with How Real Estate tells us that lenders “Require borrowers to use an FHA consultant when searching for a home as well as use a contractor that is FHA 203(k)-approved once the home is purchased and renovations start. FHA consultants are United States Department of Housing and Urban Development (HUD)-certified professionals who make sure all FHA standards are being met during the FHA 203(k) loan process.”

FHA 203(k) lenders typically have a procedure to assess a contractor’s eligibility. FHA 203(k) contractors are required to submit to the lender the following to be approved:

  • Cost estimate of renovations
  • License credentials
  • Liability insurance policy
  • General company financial data

FHA consultants are typically used by lenders to assess the suitability of a contractor. For example, an FHA consultant will receive multiple contractor bids to ensure repair costs are within reasonable estimates. It’s the responsibility of the borrower to work with an FHA consultant. To find a consultant in your area, the US Department of Housing offers a directory, which can be found here.

Streamlined FHA 203(k) Loans

Streamlined FHA 203(k) loans, similar to their conventional alternative, can fund the purchase and renovations of an owner-occupied primary residence between one and four units. However, streamlined FHA 203(k) loans only finance up to $35,000 in renovations. Furthermore, these renovations can’t be structural changes and are instead more cosmetic like new flooring.

This is in contrast to conventional FHA 203(k) loans, which finance renovations up to 50% of a property’s purchase price. Therefore, streamlined FHA 203(k) loans are best for the purchase and renovation of a primary residence in need of less than $35,000 in renovations as well as no structure updates or repairs.

However, streamlined FHA 203(k) loans also require that renovations are carried out using the following timelines:

  • Renovations must start within 30 days of purchasing a property
  • Renovations can’t last for longer than six months
  • Property cannot be vacant for more than 30 days

Because the renovation budget is comparatively lower to a conventional FHA 203(k) loan, streamlined FHA 203(k) loans don’t offer contingency reserves for unseen repair costs. However, streamlined FHA 203(k) loans do offer provisions for mortgage payments if the homeowner is required to live elsewhere during construction.

A streamlined FHA 203(k), just like its conventional alternative, combines the home purchase and renovation budget as a single loan. Borrowers should also expect to put between 3.5% and 20% of the loan as a down payment.

Unlike conventional FHA 203(k) loans, however, streamlined FHA 203(k) loans don’t always require borrowers to hire FHA-approved consultants or contractors. For DIY projects of less than $15,000, the homeowner can complete the projects themselves.

For projects between $15,000 and $35,000 or projects deemed by a lender to be too complicated, homeowners might be required to use a licensed contractor. When this is the case, lenders also require a third-party inspection after the rehab is completed.

Streamlined FHA 203(k) loans finance renovations up to $35,000, which include such things as:

  • Cosmetic repairs such as new flooring or a small kitchen remodel
  • Energy-efficient improvements like solar power
  • Plumbing and electrical

The following renovations aren’t permitted under a streamlined FHA 203(k) loan:

  • Luxury items like a pool
  • Major improvements like structural changes
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If you’d like to add luxury items as part of your rehab project, you’ll have to explore different renovation financing. Hard money loans, for example, allow for the additions of luxury items as well as normal repairs, maintenance, and structural changes.

FHA 203(k) Loan Rates, Terms & Qualifications

1. Loan Amount and Terms

Both conventional and streamlined FHA 203(k) loans finance the purchase and renovations of a one- to four-unit owner-occupied primary residence. These loans typically offer the following:

  • 15- to 30-year loan term
  • 30 to 45 days for approval and funding

Loan amounts are issued based on the lesser of either:

  • A property’s after-repair-value (ARV)
  • A property’s purchase price + costs of repairs + mortgage fees

ARV is equal to the expected fair market value (FMV) of a property after renovations are made. ARV is typically higher than a property’s purchase price plus the cost of repairs and mortgage fees. Therefore, lenders don’t usually issue loans based on ARV.

Instead, FHA 203(k) lenders typically finance between 80% and 96.5% of a property’s purchase price plus its renovation costs and mortgage fees. Borrowers should, therefore, expect to pay a down payment between 3.5% and 20% of the project’s total cost.

FHA 203(k) loans are also subject to FHA requirements that set maximum loan amounts equal to the following:

  • $217,050 to $636,150 for a one-unit property
  • $347,000 to $814,500 for a two-unit property
  • $419,425 to 984,525 for a three-unit property
  • $521,250 to $1,223,475 for a four-unit property

2. Renovations

As far as renovations are concerned, traditional FHA 203(k) loans differ from streamlined FHA 203(k) loans. Specifically, the differences are as follows:

  • The size of the overall renovation budget
  • The types of allowable renovations like cosmetic, structural, luxury, or DIY

When it comes to conventional FHA 203(k) loans, borrowers can finance repairs up to 50% of the house’s purchase price. However, the combined loan limit cannot exceed FHA maximum loan amounts.

In addition, conventional FHA 203(k) loans allow the following types of renovations:

  • Structural changes, such as removing a load-bearing wall
  • Cosmetic changes, such as new flooring, a kitchen remodel
  • Plumbing and electrical
  • Energy-efficient upgrades

Renovations cannot include “luxury items” like a new pool.

Renovations are carried out FHA-approved contractors and borrowers are required to submit the following for approval:

  • A detailed list of repairs
  • Two or three licensed contractor bids or estimates from approved contractors
  • Construction agreement or contract with a licensed contractor to oversee the renovations

Renovations have to commence within 30 days of purchasing the home and must be completed within six months. With conventional 203(k) loans, borrowers are given up to a 20% contingency for unseen renovation costs and a provision that covers their mortgage and property taxes if the renovations are extensive.

Streamlined FHA 203(k) loans can only fund up to $35,000 in renovations for a one- to four-unit owner-occupied primary residence. Structural changes aren’t allowed and streamlined FHA 203(k) loans are used more for cosmetic changes. Just like the conventional alternative, streamlined FHA 203(k) loans don’t fund luxury items like swimming pools.

Specifically, streamlined FHA 203(k) loans can finance the following renovations:

  • Cosmetic repairs such as new flooring or a small kitchen remodel
  • Energy-efficient improvements such as solar power
  • Plumbing and electrical

With a streamlined FHA 203(k) loan, borrowers can conduct some of the renovations themselves. For simple projects of less than $15,000, homeowners can complete the rehab themselves with a letter to the lender, highlighting their background and experience. For rehab projects between $15,000 and $35,000, however, homeowners must work with a licensed contractor and provide:

  • A detailed list of repairs
  • Two or three licensed contractor bids from approved contractors
  • Construction contract with a licensed contractor to oversee the renovations

Streamlined FHA 203(k) loans don’t have any contingencies and require that homeowners don’t leave their property for more than 30 days. A provision can be put in place to cover the mortgage and property taxes during the time away. However, just like conventional FHA 203(k) loans, streamlined FHA 203(k) loans require that construction starts within 30 days and is completed within six months.

For both types of FHA 203(k) loans, lenders typically issue funds in the following way:

  • Funds for the initial purchase
  • 2x payments to each contractor, including the homeowner for DIY projects

After a home is purchased, rehab funds are issued in stipends or draws based on invoices submitted by the borrower. Lenders will issue reimbursements in two separate payments to each contractor or vendor used. Up to 50% of the renovation budget is allowed as an advance in some cases.

3. FHA 203(k) Loan Interest Rates & Lender Fees

FHA 203(k) loans charge interest rates between 4.5% and 6.5%, which is slightly higher than conventional mortgages with rates between 4% and 6%. The interest rate on an FHA 203(k) loan vary based on a borrower’s personal creditworthiness. You can check your credit score for free here.

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As far as lender fees are concerned, FHA 203(k) borrowers should typically expect to cover the following:

  • 1.5% supplemental origination fee
  • 2.25% upfront mortgage insurance premium (MIP)
  • 0.5% to 1.0% monthly mortgage insurance
  • 2.5% to 5% in closing costs

This is in contrast to conventional mortgages, which have the following lender fees:

  • 0% to 1% loan origination fee
  • 2.5% to 5% in closing costs

Conventional mortgages typically require 20% of the purchase price as a down payment and therefore doesn’t require any upfront MIPs or monthly mortgage insurance.

As part of the FHA 203(k) renovation approval, borrowers are also required to cover the following:

  • $300 to $400 independent appraisal

4. Qualifications

FHA 203(k) loans are issued by the federal government under general FHA requirements. Regardless of whether you want a traditional FHA 203(k) loan or the more streamlined option, borrowers should expect to need the following to qualify:

  • 640 minimum credit score (check your credit score here for free)
  • 45% DTI ratio

Further, FHA 203(k) loans are real estate financing options that fund the purchase and renovation of a primary residence up to 4 units. Specifically, FHA 203(k) loans are best used for:

  • Conventional FHA 203(k) loans: Purchase and renovation of a new primary residence in poor condition of between one and four units
  • Streamlined FHA 203(k) loans: Purchase and renovation of a house in need of cosmetic updates of between one and units

Both FHA 203(k) loans require that homeowners conduct “owner-occupied” renovations of their primary residence. This means that borrowers must claim the property to be their primary residence and also live on the property during renovations. However, some provisions allow a borrower to live elsewhere for up to 6 months during structural renovations.

Where Can You Find FHA 203(k) Loans?

The federal government backs FHA 203(k) loans. When you’re looking for an FHA 203(k) loan, it’s important to look at all FHA-approved lenders.

This means that addition to the qualifications above, borrowers also need to provide the following FHA requirements for 203(k) loan approval:

  • Two recent paystubs
  • List of total assets
  • List of total debts
  • Mortgage insurance
  • Independent appraisal

As far as the renovations are concerned, conventional FHA 203(k) borrowers are required to submit the following for rehab budget approval:

  • A detailed list of repairs
  • Two or three licensed contractor bids or estimates from approved contractors
  • Construction agreement or contract with a licensed contractor to oversee the renovations

Streamlined FHA 203(k) loans with renovation budgets of less than $15,000 require the following for rehab budget approval:

  • Documentation supporting a borrower’s knowledge and experience

Streamlined FHA 203(k) loans with renovation budgets between $15,000 and $35,000 or for renovations that are complicated in nature require the following for rehab budget approval:

  • A detailed list of repairs
  • Two or three licensed contractor bids from approved contractors
  • Construction contract with a licensed contractor to oversee the renovations

There are national lenders such as Wells Fargo that can issue FHA 203(k) loans as well as local mortgage brokers. Each lender’s application process is different, but you should expect the following three steps when working with an FHA-approved lender:

  • Prequalification: Borrowers receive a prequalification letter with rough loan estimates.
  • Preapproval: Borrowers supply all necessary documents to verify the information given during prequalification.
  • Closing: Lenders assess the documents given during preapproval, finalize the loan approval, and issue the loan.

HUD offers a lender list where you can search your area for all FHA-approved lenders who have issued a loan in the past 12 months.

Check the list for more specific lender information. Search criteria include such things as location, property size, property type, and more. Both local lenders and national lenders are included in the search:

Search for an FHA 203(k)-Approved Lender

Bottom Line

FHA 203(k) loans are not suitable for real estate investors looking for renovation financing. If you’re an investor and would like to find out where to get hard money loans for fix and flip projects, check out our nationwide hard money lender directory. Investors who want to learn more about how to finance a rehab or fix-and-flip project should read our guides on rehab loans or fix-and-flip loans

If you don’t need funding for renovations, a conventional mortgage will be a better fit. Fill out a short form on LendingTree and let lenders compete for your business. Their online marketplace lets you quickly compare rates, offers, and find a good fit. See your options in minutes.

Visit LendingTree