How FHA 203K loans work and how to qualify

For buyers working on a budget or current homeowners looking to upgrade their home, an FHA 203k loan has many advantages. Not only do FHA 203k loans consolidate your home improvement costs and your mortgage into one payment, but they generally have easier income and credit requirements as well as a low down payment option.

Here’s what you need to know about FHA 203k loans and how to use this type of financing for your home improvement projects.

How does an FHA 203K loan work?

An FHA 203k loan is a mortgage backed by the Federal Housing Administration (FHA) that allows borrowers to finance the purchase or refinance of a home as well as the cost of home renovations. FHA 203k loans come in the form of single, long-term fixed or adjustable rate loans.

The cost of rehabilitating or repairing the property is included in the mortgage. Essentially, the renovation costs are added to the purchase or refinance loan.

There are also two types of FHA 203k loans with different sets of rules:

  • Standard loan of 203k: The standard 203k loan is for major work. The minimum amount that can be borrowed is $5,000. The US Department of Housing and Urban Development (HUD) also requires that a 203k consultant be hired to oversee the project to ensure FHA standards are met.
  • Limited/streamlined loan of 203,000: This option allows you to finance up to $35,000 on your home improvement mortgage with no set minimum. This does not cover any heavy work.

What are the requirements for an FHA 203K loan?

FHA 203k loans are intended to encourage home ownership for low-to-moderate income families, allowing them to improve older properties in need of repair. Because these loans are government guaranteed, FHA 203k loans may have more lenient qualifying requirements than a conventional mortgage and are subject to FHA loan limits.

You will also need to find an FHA approved lender. Not all lenders offer FHA loans. Repairs should be done by a licensed contractor, not the borrower.

Here’s how to qualify for an FHA 203k loan, although requirements may vary by lender:

  • Credit score: You may qualify for an FHA loan with a credit score as low as 500, but it depends on your lender. Some may require a minimum credit score of 580 or even 620.
  • Deposit: The minimum down payment for an FHA 203k loan is 3.5% if your credit score is 580 or higher. If your credit score is below 580, the minimum down payment is 10%.
  • Debt to income ratio (DTI): Your lender will look at your DTI, which should be 43% or less.
  • Maximum loan amount: You can borrow up to 110% of the value of the house after renovations, which is the price of the house plus renovation costs. the FHA loan limit for 2022 is $420,860 in low-cost areas and $970,800 in high-cost areas.
  • Occupation: You must live on the property you buy or refinance with the FHA 203k loan.

Interested in applying for an FHA loan? Find a Total Mortgage branch near you and discuss your options in person with one of our loan experts.

What is the minimum down payment for an FHA 203K loan?

The minimum down payment for FHA 203k loans depends on your credit score.

  • If you have a credit score of 580 or morethe minimum down payment you must make is 3.5% of the loan amount.
  • If your credit score is between 500 and 579the minimum down payment is 10%.

Can you get down payment assistance with an FHA 203K loan?

You can receive 100% of your deposit as a cash donation from your family or an approved organization. Some government agencies and local nonprofits may provide a down payment in the form of a grant for FHA 203k loans.

The seller or other interested parties are not permitted to provide down payment assistance with FHA 203k loans.

Can you use an FHA 203K loan for an investment property?

The FHA 203k loan is limited to primary residences, meaning you must live in the home. However, there is a way around this.

The only way to use an FHA 203k loan for an investment property is to purchase a two to four unit multifamily property. You will also need to occupy one of these units for at least a year, but you are free to rent the others.

Should you get an FHA 203K loan?

Whether or not you should get an FHA 203k loan depends on your particular situation. If you hope to use the loan on an investment property, the property must be two to four units and you must have lived on the property for at least one year.

There are also restrictions on the types of renovations and repairs that can be done, depending on the type of FHA 203k mortgage.

Most non-structural, non-luxury renovations include:

  • Make the house more energy efficient
  • Installation or replacement of parquet
  • Landscaping
  • New plumbing, electrical or sewage systems
  • Resolve health or safety risks
  • Improved functionality or curb appeal

This list does not include all projects that can be completed with an FHA 203k loan.

Explore Total Mortgage’s FHA 203K Loan Options

If you are making renovations or repairs to your current or future home, an FHA 203k loan might be the right solution. However, you must meet your lender’s requirements to qualify, and there are restrictions on the types of projects you can complete.

There are also two different types of FHA 203k loans. Which one you choose will depend on what you plan to do with your property.

Total Mortgage has been helping homeowners and buyers get the financing they need for over 20 years. Find an expert near you or apply for a loan online!

Carter Wesman

Carter Wessman hails from the charming town of Norfolk, Massachusetts. When he’s not busy writing about mortgage-related topics, you can find him playing table tennis or playing bass guitar.

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