Using an FHA 203(k) Refinance to Pay for Home Improvements

If your home needs updating, an FHA 203(k) refinance lets you roll the cost of renovation into your monthly mortgage payment.

Kate WoodSeptember 17, 2020
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An FHA 203(k) refinance lets you pay for home improvements and renovations as part of your monthly mortgage payment.

The Federal Housing Administration insures all FHA loans, providing lenders with financial backing in case borrowers default or don’t follow the loan terms.

Anyone can refinance with an FHA 203(k) — your current mortgage doesn't have to be an FHA loan.

Unlike using a credit card or taking out a personal loan, which have higher interest rates and shorter terms, a 203(k) refinance can potentially lower your current mortgage rate while giving you a longer repayment period.

FHA 203(k) refinance options

The FHA offers two types of FHA 203(k) refinance loans: Limited 203(k) and Standard 203(k). These have the same general requirements as 203(k) purchase loans; the only difference is that you're refinancing an existing home loan rather than buying a home.

Here are the key distinctions between the two types of FHA 203(k) refinance loans:

Limited 203(k) refinance

  • Provides up to $35,000 with no minimum cost requirement.

  • Lends itself to aesthetic, uncomplicated repairs or upgrades (new countertops, painting, new flooring).

  • Allows flexibility for borrowers to choose different contractors for different projects, or, with approval, complete some work themselves.

  • No inspections are required for projects totaling less than $15,000.

  • Major improvements, including structural improvements, are ineligible; you would have to use a standard 203(k).

Standard 203(k) refinance

  • Has no price cap, but projects must total $5,000 or more to be eligible.

  • Requires you to work with a licensed general contractor. With FHA approval, you may be able to do some work yourself.

  • Requires inspections on all work regardless of cost.

  • Covers structural improvements, like room additions or replacing faulty plumbing or electrical systems.

Nerd tip: No matter which 203(k) refinance you choose, the total value of the loan can't exceed the current FHA mortgage limits for your area.

With either type of 203(k) refinance, you'll have to make an upfront mortgage insurance payment and pay monthly FHA mortgage insurance premiums. You'll also need an FHA appraisal, even if you had one when you bought your home. And both types require that the projects financed be completed within six months.

The FHA has rules about the types of improvements you can pay for with 203(k) refinance, but they’re not too restrictive.

With a standard 203(k), you could go as far as rebuilding a house from the foundation up. Improvements that are not allowed are "luxury items" (like adding a swimming pool or tennis court) and renovations that are for commercial use (any improvement with the sole purpose to help you run a business out of your home).

Is a 203(k) refinance right for you?

Before you talk to a lender, get your remodeling ducks in a row by requesting cost and availability estimates from several contractors. You want to keep things on track and within the time limits of your 203(k) loan. Be sure that the contractor is willing to take on the extra paperwork and deadlines that come with an FHA 203(k) refinance.

Keep in mind that most contractors book projects out a few weeks (or more) in advance, and a 203(k) loan could take longer to close than the typical 30 to 45 days for most conventional loans. On top of that, a 203(k) refinance requires that work begin within 30 days after the first disbursement date (in other words, the first payment to the contractor) — usually the same day as your closing.

You can refinance up to 96.5% percent of your mortgage with an FHA 203(k) loan as long as you have a credit score of 580 or higher. However, lenders can set their own, more stringent standards that go beyond FHA loan requirements for minimum credit scores, debt-to-income ratios and loan-to-value ratios.

Still, when mortgage rates are low, rolling the cost of a major remodeling project into your refinance might make more sense than other home improvement financing options, which often come with higher interest rates and shorter repayment terms.

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