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Whether you’re purchasing a home that needs work or looking to renovate your current property, the FHA 203(k) loan allows you to finance the home and necessary repairs with one mortgage.
Key Takeaways:
- The FHA 203(k) loan helps homeowners and homebuyers finance both their mortgage and necessary home renovations in one loan.
- You can use a 203(k) refinance to potentially get a lower rate while financing renovations.
- Two types of 203(k) loans are available: the Standard 203(k) for repairs over $75,000 and the Limited 203(k) for smaller projects under $75,000 (effective November 4, 2024).
- Eligible projects include structural repairs, energy efficiency upgrades, and cosmetic improvements, like new flooring or paint.
- Homeowners need to meet specific requirements, including an appraisal, working with a HUD consultant (with a Standard loan), and hiring an approved contractor.
- The benefits of a 203(k) loan include flexible credit requirements, a lower down payment, and the potential to increase your home’s value after repairs.
What is the FHA 203(k) Rehab Loan?
With home repairs and renovations being so expensive, these projects can pile up quickly. To avoid losing value in their property, homeowners who qualify can obtain an FHA 203(k) Renovation (or rehab) loan.
Often called a 203(k) loan, this type of mortgage allows homeowners to include the cost of their estimated home repairs and renovations within their home refinance. The FHA 203(k) Rehab loan comes in two types:
- Standard 203(k) Loan
- Limited 203(k) Loan
Effective November 4th, 2024, the standard 203(k) loan is for renovation and repairs that are expected to exceed $75,000 while the limited 203k loan is for those that would be less than that mark. This limit will increase from $35,000. As you can imagine, the standard option is for more extensive renovations while the limited is reserved for smaller, usually cosmetic, repairs.
Wondering what types of renovations or repairs may be approved to receive a 203(k) Renovation loan? You may be surprised by the extensive list of home projects that could qualify you to receive this type of financing,
Eligible Home Projects for the 203(k) Renovation Loan
- Structural repairs to the foundation, roof, or load-bearing walls (note: structural repairs are only available with the Standard option).
- Purely cosmetic updates like a bath or kitchen remodel
- Improvements that are proven to make the home more accessible (ramps, railings, etc.).
- Upgrades that will make the home more energy efficient (HVAC upgrade, solar panels, etc.).
- Removal of hazards such as mold and asbestos as well as improvements made to faulty electrical functions.
It’s important to note that anyone seeking a Standard 203(k) rehab loan will need to meet with a U.S. Department of Housing and Urban Development (HUD) consultant. This HUD professional will access the property as well as the proposed renovations and repairs.
From their analysis, they will create a document describing the needed repairs, which will be an essential component of the loan application.
Related: Pay For Home Repairs With a Refinance
FHA 203(k) Loan Requirements
Unlike other types of FHA refinance, the initial mortgage doesn’t need to be an FHA loan to refinance with an FHA 203k rehab loan. As this loan allows home repair and renovation costs to be wrapped in with the refinance of the home, homeowners should anticipate additional requirements to obtain lending.
- Equity Requirement: If you’re buying the property, you need to put 3.5% down for the home price and improvement cost. For refinances, you may not need any equity since the loan is based on the future appraised value. If your repairs improve the future value more than their cost, that difference can be your equity requirement.
- DTI Ratio: The borrower’s DTI (debt-to-income) ratio must be less than what the lender considers affordable or what the FHA typically allows, which is typically around 43% of their gross monthly income.
- Credit Score: To qualify for an FHA 203(k) rehab refinance, you usually need a credit score of at least 580. However, this cut-off can vary between lenders and can change with the ever-shifting mortgage industry.
- HUD Consultant: Homeowners will need to work with a HUD consultant for the Standard program and may choose to use one for the Limited 203(k).
- Appraisal: An appraisal is required as a part of the refinance process to determine the home’s current and future value.
- Contractor Requirement: Homeowners will be asked to hire an approved and insured contractor to complete the indicated repairs and renovations and within a pre-specified timeframe.
- LTV Ratio: Your home’s loan-to-value (LTV) ratio must meet the lender’s requirements, ensuring that the loan amount doesn’t exceed a certain percentage of the property’s appraised value or purchase price, whichever is lower.
The above FHA 203(k) Loan Requirements are the main criteria for applying for this form of lending. However, keep in mind that individual lenders can impose their own requirements.
More Like This: Want more insight about the 203(k) renovation loan along with other forms of FHA refinance? Review our article, FHA Loan Refinance: Requirements and Options.
» MORE: See today’s refinance rates
Benefits of FHA 203(k) Loans
Paying for home repairs out-of-pocket often isn’t an option for most homeowners. With most major home projects costing thousands of dollars, one of the major benefits of FHA 203(k) rehab loans is the ability to finance these expenses along with the mortgage or refinance.
In addition to the 203(k) loan making it feasible for homeowners to complete necessary renovations, many also benefit from:
- 580+ credit score
- Base the loan amount on future value
- Lenient income and debt-to-income requirements
- Easier to qualify for than conventional rehab loans
Current FHA 203(k) Loan Rates
Current FHA 203(k) loan rates will depend on a variety of factors. From the current market conditions to your individual financial standing, there is quite a bit that goes into determining an individual’s mortgage rate.
Speaking to a trusted lender is the best way to receive accurate answers when it comes to your individual mortgage rate for an FHA 203(k) renovation loan.
They can assess your financial situation and, based on the market and your qualifications, give you a personalized answer.