FHA 203(k) guidelines – How to use one loan to buy and fix up a home
While some people are drawn to move-in ready homes, others welcome the chance to tackle a more challenging fixer-upper.
Making even just a few key improvements to a home can help you quickly build up equity.
One challenge, though, is finding a lender willing to approve the loan for a home that requires repairs. That’s the beauty of something called the FHA 203(k).
Understanding an FHA 203(k) loan
Also sometimes referred to as a rehab loan or even an FHA construction loan, a type of loan called the FHA 203(k) allows you to finance two major expenses at the same time.
- The house
With this type of loan, the lender’s able to track and verify those repairs. This gives you a better shot at getting a loan for a home in need of repairs.
What types of repairs CAN I do with the loan?
It depends on which of the two types of 203(k) loans you’re trying to get. The two are slightly different and are used for different things.
- Limited 203(k)
- Standard 203(k)
More lenders offer the Limited 203(k) loan.
With this type of 203(k), you’re limited to making mostly cosmetic, non-structural repairs to the home. The list is extensive, but think about making such repairs as
- Upgrading/replacing HVAC
- Replacing flooring & carpeting
- Replacing appliances
- Replacing the roof
- Remodeling kitchen or baths
- Adding new paint
- Energy efficient improvements
The Standard 203(k) loan, on the other hand, is less restrictive in terms of making major changes to the home. It covers things like:
- Making structural changes
- Larger landscaping projects
- Moving the home to another location
- Converting a single-family home to multi-unit
- Connecting to water/pubic sewer
What CAN’T I do with the loan?
It doesn’t matter which of the two 203(k) loans you choose for certain projects, because you can’t use rehab funds for
- Projects that exceed 6 months
- Luxury items like swimming pools, tennis courts
How else is the FHA 203(k) different?
While this type of loan does allow you to make certain repairs to a home, it’s not exactly the same as a standard FHA loan, either.
- Higher mortgage rates
While the rate for this type of loan is competitive, it is slightly higher than a standard FHA loan.
You’ll also have to factor in the cost of paying FHA mortgage insurance. Still, the FHA 203(k) can be a good deal for certain homebuyers.
If the repairs are mostly minor or the renovation is too much or too luxurious to meet FHA guidelines, you’ll probably want to consider using another type of loan. In this case, you may want to consider something like a Home Equity Loan or a Home Equity Line of Credit.