The FHA offers a unique type of product that allows a purchase or refinance mortgage loan to include the expected cost of repairs and renovations. With a minimum 3.5% down payment for qualified applicants, a 203(k) mortgage rehabilitation loan can exceed the purchase price but not the FHA maximum loan amount, which can vary among counties.
Mortgage loans tend to have a lower interest rate than personal or home improvement loans, and since the only required equity is the down payment amount, the 203(k) loan is an attractive option for improving a home. However, FHA loans are considered high-fee loans that compel the borrower to pay a monthly mortgage insurance premium for the life of the loan. So, a prospective borrower might want to weigh the convenience and lifetime costs of a 203(k) loan against other available loan products.
There are two versions of a 203(k) mortgage. One is a Limited 203(k) for minor repairs and updates, and the other is the Standard 203(k) that allows for more extensive work. Both types of products are for owner-occupied primary residences. The construction of luxury items such as pools, tennis courts, outdoor fireplace pits, and gazebos is not an approved use.
Limited 203(k)
A Limited 203(k) requires little paperwork and is a suitable loan for homes needing cosmetic changes and light repairs with a total cost not to exceed $35,000.
- An FHA-approved do-it-yourselfer may undertake work that does not exceed $15,000.
- An FHA-approved general contractor must complete any permitted work.
- This loan cannot be used for major remodeling and structural repairs, and the work must start within 30 days after closing and be completed within six months.
Suitable projects include:
- Repair, replacement, or installation of roof, siding, tiles, and gutters.
- Repair of pools.
- Repair or replacement of windows and doors.
- Repair or replacement of HVAC, plumbing, and electrical systems.
- Repair or replacement of appliances.
- Interior and exterior painting.
- Minor kitchen and bathroom remodeling.
- New flooring.
- Improving functionality, such as adding a patio, deck, or disability enhancements.
Standard 203(k)
For projects costing at least $5,000 that involve significant renovations, repairs, and structural changes, the Standard 203(k) might be an appropriate choice. Unlike the limited product, the borrower can use the Standard 203(k) to convert a property into one, two, three, or four residential units. It can also be applied toward a demolition and rebuild undertaking as long as the original foundation remains in place. These loans involve more paperwork and a longer time for approval than the limited loan. No do-it-yourself work is permitted, and a HUD consultant must oversee the general contractor. The loan amount can include the cost of permits, architectural fees, and consultants.
An FHA Limited or Standard 203(k) rehabilitation loan includes repairs and remodeling costs in a purchase or refinancing loan. This all-inclusive approach is convenient for borrowers who want to make only one monthly mortgage payment. However, FHA loans have high fees. For more information, contact an FHA lender or loan originator.