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An FHA 203(k) loan allows you to buy or refinance a home that needs work and roll the renovation costs into the mortgage. You'll get a loan that covers both the purchase or refinance price and the cost of upgrades, letting you pay for the renovations over time as you pay down the mortgage.
FHA 203(k) financing can be an affordable way to pay for home improvements and may expand your homebuying options, especially in high-cost areas. Because 203(k) loans are insured by the Federal Housing Administration, they may offer more lenient qualification requirements than other renovation loans.
Here’s what you need to know about FHA 203(k) mortgages and how to use them to finance home improvements.
» MORE: Get an overview of FHA loans
How does an FHA 203(k) loan work?
There are two types of FHA 203(k) loans: the limited — sometimes referred to as “streamline” — and the standard. Each of these rehab loans also has a 203(k) refinance option for current homeowners.
“203(k) loans have rules about how much you can borrow for renovations and what you can do with the money.”
Limited and standard 203(k) loans have different rules about how much you can borrow for renovations and what you can do with the money. Improvements the FHA deems luxuries, like a swimming pool or an outdoor kitchen, generally aren’t eligible.
203(k) limited loan: Provides up to $35,000 for renovations, but major structural repairs aren’t eligible.
203(k) standard loan: Renovations must cost at least $5,000, and major structural repairs are eligible. Borrowers using a 203(k) standard loan must hire a HUD consultant to oversee the renovation process.
203(k) eligible projects
Among other things, FHA 203(k) mortgages can be used to:
Improve a home’s functionality or attractiveness.
Eliminate health and safety hazards.
Rehab the plumbing or sewer systems.
Install or repair the roof, gutters and downspouts.
Install or replace the flooring.
Improve major aspects of the landscaping.
Ensure accessibility for a disabled person.
Make a home more energy-efficient.
Note: This is a summary list and does not include all projects that can be financed with 203(k) loans.
Improvements paid for with a 203(k) loan generally must be completed by a licensed contractor and are subject to approval by an FHA appraiser, and in some cases, a HUD consultant.
It’s wise to start talking to contractors as soon as possible to get on their radar and ensure you can start the project soon after closing. Because a lot of specific paperwork and protocols go along with a renovation financed by an FHA 203(k) loan, you will want to shop around for a contractor with previous experience working on projects that were paid for with this kind of loan. The renovation must be completed within six months.
Who qualifies for an FHA 203(k)?
Although it has a very specific purpose, the 203(k) loan is still an FHA mortgage at its core. This means it has more lenient qualification requirements than a conventional mortgage and is subject to FHA loan limits.
Credit score: You’ll need a credit score of at least 500 to qualify for an FHA 203(k) loan, though 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. You’ll have to put down 10% if your credit score is between 500 and 579. Down payment assistance may be available through state home buyer programs, and monetary gifts from friends and family are permitted as well.
Max loan amount: FHA loan limits vary depending on where you live, but are generally capped at $356,362 in low-cost counties and $822,375 in high-cost counties.
Foreclosure: In most cases, a foreclosure within the past three years will prevent you from qualifying for an FHA loan.
How do I get an FHA 203(k) loan?
To apply for a 203(k) loan, you’ll need to find an FHA-approved lender and be ready to provide your Social Security number, as well as documents that verify your income, debts and credit score. When researching your options, consider your own profile and needs as a home buyer — some FHA 203(k) lenders are a better match for borrowers with lower credit scores, for example, while others may provide an exceptional experience for first-time home buyers.
While FHA loans typically have lower closing costs than conventional mortgages, there may be additional origination fees and a higher appraisal fee.
Are FHA 203(k) loans a good idea?
If you’re buying a fixer-upper, or fixing up a home you already own, the FHA 203(k) mortgage may be a good option, but be sure to weigh the pros and cons against your unique financial needs.
The HomeStyle loan from Fannie Mae and the CHOICERenovation loan from Freddie Mac are two common conventional renovation loans. They might be a better fit for those with higher credit scores or the desire for improvements the FHA considers “luxuries.”
Pros of a 203k loan:
Has low minimum down payment and credit score requirements.
Offers a lower interest rate than credit cards or personal loans.
Can cover mortgage payments if the home is uninhabitable during renovations.
Cons of a 203k loan:
Requires FHA mortgage insurance.
Can’t be used for investment properties.
May require a HUD consultant and an experienced contractor.