Borrowers who wish to buy a fixer-upper often run into trouble when they discover their lender will not provide a loan on a home that is considered "uninhabitable" in its current condition.
An FHA 203k loan allows consumers to borrow money for home improvement and home ownership in a single loan. These loans are offered by the Federal Housing Administration (FHA) to encourage lenders to loan money for seemingly risky purchases, with a goal of revitalizing neighborhoods and improving homeownership opportunities.
FHA 203k loans are designed for damaged homes or those requiring significant rehabilitation. The loan covers the cost of the property as well as necessary repairs.
How FHA 203k Loans Work
The maximum FHA 203k loan depends on whether it is a regular loan or a streamlined FHA 203k. With a regular loan, the maximum amount a borrower may receive is the lesser of the as-is value of the property plus repairs, or 110% of the estimated value of the home once repairs are complete. With a Streamlined FHA 203k, borrowers may receive a loan for the purchase of the home plus $35,000.
FHA 203k loans may be adjustable or fixed rate mortgages with a 15- or 30-year term. Rates tend to be slightly higher than a traditional FHA loan.
Homes That Qualify
For a regular 203k loan, the home may have structural repairs that are necessary. A Streamlined 203k loan is for homes that require non-structural repairs.
To qualify, the homeowner must plan to live in the home. The following types of homes qualify for an FHA 203k mortgage:
- Tear-downs, as long as part of the foundation remains
- Existing construction, that is at least 12 months old
- Single-, Two-, Three-, and four-family homes
- Condos if they are approved for FHA loans
- Mixed-use properties if only the home portion will be repaired
- Homes that must be moved to rest on a new foundation
Guidelines on Qualifying Repairs
The FHA offers strict guidelines on which repairs can qualify for a 203k loan, and the lender may stipulate which repairs are allowed. Allowable repairs include the following:
- Bathroom remodels
- Kitchen remodels
- New appliances
- Room additions or second-story additions
- Patios or decks
- Finishing a basement or attic
- Energy conservation repairs
- Roofing and flooring
- HVAC (heating, ventilation, and air conditioning)
- Disability access
- Site grading
Additionally, labor costs must be included in the loan, even if the homeowner plans to perform the repairs.
Repair work must be completed within six months of obtaining a 203k loan.
Pros and Cons of a 203k Loan
The main benefit of an FHA 203k loan is they allow buyers to purchase a home that needs repairs that would otherwise have been unaffordable. There are usually minimal down payment requirements, and interest rates tend to be low, although they are not as low as a traditional FHA loan.
Not all properties will qualify for a 203k loan, and not all lenders offer this product. To apply, the borrower must provide proof of income, assets, and sufficient credit, as well as a home appraisal, how much the home will be worth after repairs and a detailed proposal of the work necessary on the home. A 203k closing may take anywhere from 60 to 90 days.