Basics of a 203(k) Home Renovation Loan

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Buying a “fixer upper” house might be an economical option for first-time homebuyers and families looking to upgrade to a bigger house. Some families simply need to renovate their current house. Depending on how much renovation you are going to need, a traditional bank might not allow the approve funds necessary to close the mortgage or conventional renovation loan.

To avoid a potential crisis, you should take a look at the Federal Housing Administration (FHA) 203(k) home renovation loan program. A home renovation loan can be win-win as it improves the value of a home and the quality of its neighborhood.

What Is A 203(k) Home Renovation Loan?

A 203(k) home renovation loan is a program by the Federal Housing Administration, an agency of the Department of Housing and Urban Development (HUD). This program lends money to homeowners to complete renovations on their existing house. They also provide funds to a homebuyer allowing them to secure funding in order to purchase and renovate their new home. Once the home purchase is final, the FHA will release 203(k) renovation funds that owners can use to improve the house.

For people who use 203(k) loans, it might be the only way to secure financing to purchase a “fixer-upper” house that they can purchase at a reduced price because it needs renovations. The 203(k) program does not release mortgage funds. Rather, it insures mortgages and home renovation loans for homeowners with less than perfect credit.

Once a 203(k) applicant is approved, the lender will issue the money in scheduled draws as certain milestones are reached. Any extra money from the renovation loan will automatically apply to the principle of the mortgage loan.

Who Qualifies For A 203(k) Home Renovation Loan?

A 203(k) loan is only available for HUD-approved properties. The target applicants are homeowners, not investors, who will actually reside in the house once the repairs are complete. Qualifying homeowners will have to move into the new residence within 30 days of the loan closing date if the house is habitable. Alternatively, they will have to move within 30 days once all repairs and upgrades for an inhabitable house is completed.

The 203(k) creditworthiness qualifications are similar to other FHA loan programs that are designed for borrowers with less-than-perfect credit. Lenders might only require a 3.5% down payment to approve a mortgage and renovation loan. As a general guideline, applicants will want to have a FICO score of 580 or above to have the best chance of getting approval.

Eligible Properties:
  • Single-family to four-family dwellings (must all be attached)
  • Existing construction that has been completed for at least one year
  • Move an existing house to an approved property
  • Residential portion of mixed-use properties
  • FHA-approved condos
  • Tear down of the existing house if original foundation remains

The above is a very general list. For more information about property qualifications, please visit the official HUD website.

Also, 203(k) loans can be obtained six months after a new house is purchased without an FHA-mortgage. This allows more flexibility for homebuyers that have funds available to purchase a “fixer-upper” without having to acquire a home loan and renovation loan at the same time.

What Services Are Eligible For A 203(k) Home Renovation Loan?

The list below is from the HUD 203(k) website. It lists the renovations and upgrades that qualify for a 203(k) loan:

  • structural alterations and reconstruction
  • modernization and improvements to the home’s function
  • elimination of health and safety hazards
  • changes that improve appearance and eliminate obsolescence
  • reconditioning or replacing plumbing; installing a well and/or septic system
  • adding or replacing roofing, gutters, and downspouts
  • adding or replacing floors and/or floor treatments
  • major landscape work and site improvements
  • enhancing accessibility for a disabled person
  • making energy conservation improvements

If you are a home buyer or existing homeowner seeking a 203(k) home renovation loan for any of the above renovations, you will have to decide between one of two 203(k) loans to apply for.

Home Renovation

Two Different Types of 203(k) Home Renovation Loans

There are two different 203(k) loans available. Depending on the renovations required, applicants will need to decide which loan best fits their circumstances. Work on both loan types must begin within 30 days of the closing date. By renovating your current home, this loan will allow you the opportunity to increase the resale value for a future sale. Or you can use it to improve the quality of life by addressing repairs or energy/insulation inefficiencies that are causing you to pay higher energy bills.  Homebuyers can purchase an affordable house, complete the necessary repairs, and take part in the “American dream.”

Standard 203(k) Home Renovation Loan

This loan is for complex projects that require engineering or architectural drawings and inspections. The standard loan covers renovations and upgrades such as:

  • New construction (including room additions)
  • Relocation of a load-bearing wall
  • Exterior grading & landscaping
  • Any renovation that makes the home uninhabitable until completed
  • Repairs to structural damage
  • Work that will take more than 6 months to complete

Borrowing limits for a standard 203(k) loan depend largely on which region of the United States that an applicant lives in.

Limited 203(k) Home Renovation Loan

This is the most common type of 203(k) loan. Called a “limited” or “streamlined” 203(k), it is intended for renovations to the actual house that will not exceed $35,000. It is also for renovations that do not require any consultants or architectural/engineering drawings. The house must also be habitable during the loan term and all renovations will need to take less than 6 months to complete.

Here is a list of renovations that can be completed with a limited loan:

  • Basic remodeling, like the kitchen or installing new carpet, without any structural repairs required
    • Includes purchase of new appliances such as washer/dryer, oven, and refrigerator
  • Basement finishing, remodeling, and waterproofing
  • Improve accessibility for people with disabilities
  • Painting of interior or exterior walls
  • Replacement of windows, doors, and exterior siding, including weatherization
  • Repair/Replacement/Upgrade of roofs, gutters, downspouts, HVAC system, flooring, septic tank or well, plumbing and electrical systems, exterior decks or porches

To save money, the homeowner can complete the renovations himself if he can demonstrate professional expertise. If so, the lender will only provide money to pay for supplies and not the labor of the homeowner.

Are 203(k) Home Renovation Loans A Good Idea?

The FHA is the only government agency that is entirely self-funded! This means they do not have to take any taxpayer money to operate and receive their revenue from proceeds of mortgage insurance. Because of this, they are able to make loans that will help people buy and improve properties they couldn’t have purchased with a conventional loan.

It is essentially a win-win for the homeowner and community. Yes, borrowing money and going into debt isn’t always the wisest decision. But these loans help people establish roots and take pride in their neighborhoods and their economy. The 203(k) loans can help turn blight into beauty.