FHA 203(k) Renovation Loan
Taking on a home that needs renovations may seem a little intimidating, but it also has a lot of advantages.
Homes that need repairs are often listed at lower prices. Renovations often bring up the value of the home, giving you an immediate bump in equity. Plus you get the chance to make the home your own.
With the FHA 203(k) loan tailored to fit this exact situation, financing the purchase or refinance of your home in addition to renovations can be simple and affordable.
What is an FHA 203(k) Renovation Loan?
An FHA 203(k) renovation loan finances both the cost of purchasing a home and the cost of renovating it. A 203(k) loan can also be used to refinance your existing home loan and pay for renovations on your current home.
Like a traditional FHA purchase or refinance loan, 203(k) loans are backed by the government through the Federal Housing Administration. FHA-approved lenders are insured by the government to cover risks if borrowers can’t pay back these loans. A Mortgage Insurance Premium (MIP), paid during the life of each FHA loan, insures against losses like this.
This backing allows lenders to offer renovation loans with more flexible qualification requirements than conventional loans, including lower credit scores. It also allows for options such as low down payment amounts, starting at 3.5% of the home’s purchase price and total project costs.
Streamline 203(k)
A Streamline 203(k) covers the purchase price of a home, as well as renovations and related expenses that cost up to $35,000.
Because it’s meant to finance less extensive home improvements, it often doesn’t require the use of a consultant, architect, etc., or several inspections as a standard 203(k) loan would. This makes it simpler to apply for and less costly overall than a standard loan.
Standard 203(k)
The standard 203(k) loan is best for more complicated projects that require structural changes that would keep you from living in the home during the renovation.
This loan and these types of extensive projects would require you to hire professionals to manage the project as well as engineering or architectural drawings and inspections, and it would cover the costs to do so.
How to Get an FHA 203(k) Loan
To learn whether an FHA 203(k) loan is the best option for affording and renovating your home, connect with us. To get you started, we’ve outlined the steps and documentation needed to help you understand the process.
The Financing Process
When looking to buy a home, we recommend starting with a loan pre-approval, which you can get before even finding the property you want to purchase. By sharing basic information about your potential purchase and renovation plans, we’ll work with you to pull your credit report and discuss your finances, as well as how to ensure your mortgage is affordable.
Before finalizing the loan, you’ll need to choose an eligible property and a contractor or other needed professionals who will complete the renovations. You’ll also need to get estimates for the repairs that are needed.
We’ll discuss the terms you qualify for and your options, as well as request various documentation for the underwriting process to make sure the loan begins on a solid foundation.
We’re with you through each step, leading to a simple and efficient closing so that you can move forward with renovating your home. Renovations can begin once the loan closes.
203(k) Requirements to Meet
These are some of the common requirements often needed to qualify for an FHA 203(k) renovation loan. If you have questions about these requirements, we’re here to help.
- Credit score requirements vary. In most cases, a credit score of 500 or higher qualifies. This may shift lower or higher based on other factors such as Debt-to-Income ratio and down payment amount.
- Through underwriting evaluation, you’ll need documentation of consistent income with a Debt-to-Income ratio at or below 43%. This ratio shows how much of your monthly income goes to paying your debt.
- A down payment of 3.5% or more of the home’s purchase price and total project costs is required. This minimum requirement goes up based on your credit score and finances. Gift down payments are allowed.
- You must plan to live in the property you’re buying as your primary residence. 203(k) loans are not meant for fix and flip or investment projects.
FHA 203(k) Renovation Loan FAQs
Financing the purchase or refinance and renovation of a home is an important investment. It’s ok to have questions. We’ve compiled answers to the frequently asked ones, but don’t hesitate to ask more.
You have a handful of options when choosing the right loan to buy or refinance a home. Loan types often differ based on their qualification requirements and the terms they offer, such as the loan’s length, interest rate and whether it’s fixed or adjustable, as well as the minimum down payment amount. We can help you weigh these options to see what loan program makes the most sense for you.
An FHA 203(k) loan is meant specifically for the purchase or refinance and renovation of a home. It offers the opportunity to have one loan that covers both the cost of the home and the project costs to renovate it.
With that single loan comes specific requirements such as working with licensed contractors, using the funds for specific types of repairs, and living in the home as your primary residence for at least 12 months.
With these requirements and backing from the FHA also comes more flexible standards related to your personal finances, making it easier to qualify without a high credit score or down payment.
As we mentioned, standard 203(k) loans cover more extensive renovations compared to the streamline 203(k). In any case, a 203(k) loan is meant to cover home improvements that range from things like curb appeal and energy efficiency to structural and safety issues.
A standard 203(k) loan can finance renovations such as moving load-bearing walls, major landscaping issues, sidewalk or driveway repairs and other major structural issues.
On the other hand, a streamline 203(k) loan can finance renovations including kitchen and bathroom remodeling, window and door replacement, new flooring, new paint, and less extensive repairs.
In many cases, 203(k) loans are meant to finance the cost of repairs that are done by professional, licensed contractors. So it often can’t finance repairs and renovations you do on your own.
The bottom line is that renovations that improve the value of the property may be covered by a 203(k) loan. We can help you determine if a streamline or standard loan is best.
How much you can borrow, or your loan limit, with a 203(k) loan depends on a handful of factors.
You can borrow up to 110% of the property’s proposed future value, or the home price plus repair costs, whichever is less.
The total purchase price plus renovation costs must also fall within FHA limits for the area where the property is located.
Keep in mind too that a streamline loan can cover the purchase price of a home, as well as renovations and related expenses that cost up to $35,000.
You’ll want to consider how much you’ve been able to save for a down payment, the price of the house you want to buy, the cost of renovations, and how the down payment amount impacts your potential mortgage.
With FHA loans, you’re also able to use a gift toward your down payment amount, as long as it’s well documented and clearly not a loan.
A typical minimum required down payment amount for FHA 203(k) loans is 3.5% for credit scores of 580 or more. With a higher down payment at 10%, you may qualify with a lower credit score, down to 500. Depending on your current finances and your homebuying situation, various requirements are considered to determine your minimum down payment amount.
To offer flexible qualification requirements, FHA loans require a Mortgage Insurance Premium (MIP). With an FHA loan, you’ll pay an upfront MIP that is included at closing, as well as an annual MIP, which becomes part of the monthly mortgage payment. The annual MIP decreases each year, over the lifetime of the loan.
MIP can be reduced based on various factors, such as if you have a higher down payment or a shorter term length.
For example, if your down payment is less than 10%, the MIP on your new FHA loan lasts for the life of the loan, reducing slightly each year. If your down payment is 10% or more, the annual MIP will only last 11 years.
You may also be able to eliminate MIP sooner by refinancing your loan once you build up enough equity.