Renovating a home can be very expensive, and getting a loan to buy a home needing substantial repairs can be difficult, too.
Fortunately, the FHA 203(k) home renovation loan — made through private government-approved lenders but insured by the FHA — offers an option. In fact, it's sometimes the only option for buying a fixer-upper because most lenders won't finance a home that's not habitable. (See also: 10 Home Renovations That Almost Pay for Themselves)
Home buyers can use the home renovation loan to purchase homes at substantial discounts, and current homeowners can use it to refinance their current mortgage and pay for renovations, repairs, or additions. It's the perfect option for handyman specials, homes needing "tender loving care," and foreclosure sales.
Purchasing and renovating a home typically entails a mortgage to buy the property, a short-term loan with a higher mortgage rate to finance rehab work, and another loan to pay off the interim renovation loan. But the FHA 203(k) program finances the purchase and renovation of homes — or the refinance and renovation — with a single loan.
The loan program has other advantages beyond convenience.
Because appraisal is based on the value of the home after renovation work is completed, borrowers qualify for a larger loan amount. Home buyers can finance up to the purchase price or 110% of the property's after-improved value.
Eligible Projects
Many kinds of projects are eligible, including additions, landscaping, energy-efficiency projects, kitchen remodeling, finishing basements or attics, as well as replacing roofs, plumbing, and HVAC systems. (See also: What to Look for in a Fixer-Upper)
The loans can also be used to move a building to the mortgaged property or convert a single-family home into a duplex, triplex, or four-unit home.
Cooperative units are not eligible for the program, but the interiors of individual condo units are eligible if the condo complex has FHA approval.
The FHA may let you do the work yourself if you can prove you're qualified. You can use the loan to pay for supplies, but not to pay yourself. (See also: Is DIY Home Renovating for You?)
Approval Process
After you find a property and estimate rehab costs, you can use HUD's lender search page to locate lenders. After the loan is approved, an escrow account holds money for rehab work and funds are disbursed from the account as work proceeds.
The program's largest drawback is probably that it's paper-intensive with plenty of bureaucracy.
First of all, avoid some of the bureaucracy by investigating the FHA's Streamlined 203(k) program if you're interested in a smaller project. The streamlined program lets home buyers and homeowners finance up to $35,000 for rehab work and provides easier access to funds.
Have you taken advantage of the FHA's 203(k) loan program? What was your experience like?
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Excellent article - only thing I would add is to make sure you interview the specialist well!
I considered but decided against a 203(k) years ago because of the hassle.
However, its cousin, the 203(b) is worth the hassle for some folks because you can include the renovation costs in the purchase mortgage. That alone can save tremendous costs.
It's true, the FHA 203k home improvement loan can be a great option for buying a fixer upper. It's even great for just updating a home you're buying - like new appliances, carpet, paint or maybe window upgrades. And with a cost of about $6 a month more for every $1,000 in work you finance, it's an affordable monthly expense for a lot of us.
Thanks for posting about this remodeling finance option. It's so important to find an expert 203k lender like you said, who has a team of experts and trusted resources. Good stuff!
Dan Moyle
Great job covering the ups and downs of the FHA loans. They are a good option for some people, and make owning a home possible for a lot of folks who maybe couldn't otherwise.