FHA 203(k) loans: Definition, types, and qualifications

^{This article is for educational purposes only. JPMorgan Chase Bank, N.A., does not offer FHA 203(k) loans. Any information described in this article may vary by lender.}

Quick insights

• FHA 203(k) loans can be used to roll renovation and repair expenses into the overall cost of a mortgage.
• Both homebuyers and current owners can use this type of loan to make updates to a property.
• These loans include limitations on property type, cost of repair and overall home value.

When shopping for the right house, a “fixer-upper” might not be your first choice. After all, arranging home repairs as a new owner can be costly and time-consuming. However, with the support of an FHA 203(k) loan from the Federal Housing Administration, it may be possible to roll the costs of renovating into your overall mortgage.ec-requirements-and-eligibility

What is an FHA 203(k) loan?

An FHA 203(k) loan is a government-backed mortgage which can combine the cost of renovations and the value of a home into a single loan. These loans can be used by both homebuyers and current owners, bringing a distinct advantage to each by reducing out-of-pocket repair costs.

How FHA 203(k) loans work for homebuyers

203(k) loans are often obtained by homebuyers who are looking to make a “fixer-upper” property move-in ready. For buyers, there is an advantage in not having to pay for these repairs completely out-of-pocket. For example, a homebuyer may want to buy a home for $175,000 but needs $25,000 to repair the roof and plumbing right away. A $200,000 FHA 203(k) mortgage, a single loan, could cover both the repair and home price. The loan would be repaid in monthly installments like any other mortgage.

How FHA 203(k) loans work for homeowners

This type of loan can also be used by current owners who want to make improvements to their residence, either in preparation to sell or for continued living. As an example, a homeowner with $50,000 left on their mortgage wants to undertake a $10,000 kitchen renovation. With an FHA 203(k) loan, the home could be refinancedrefinance-hl000061 into a new loan of $60,000. This would finance both the renovation and outstanding mortgage instead of paying for the renovation outright.

Types of FHA 203(k) loans

There are two sub-types of FHA 203(k) loans, standard and limited. The main difference is that standard loans are typically used for more complex projects, while limited loans are generally for lower-cost updates. Either can be used by buyers or owners. There are a few other notable nuances, as well.

FHA 203(k) Standard Loans

Sometimes referred to as a “Full Loan,” this type of 203(k) loan is more suited to larger, more complex home repairs. Repairs with a standard loan could include major structural renovations, roof replacement, plumbing work or accessibility updates. With this type of loan, an FHA-approved consultant is required to evaluate the work proposal, approve the distribution of funds, monitor the project and appraise the property after renovations are done.

While there is no minimum disbursement for a 203(k) Standard, it will have a maximum, which varies depending on the county where the property is located. The involvement of a consultant helps ensure that the repairs do not improve the property beyond the limits for the loan. If the limit is exceeded, the difference may need to be repaid.

FHA 203(k) Limited Loans

Also referred to as a “streamline loan,” this type of mortgage is intended for home updates that have a more limited scale. Examples could include the purchase of new appliances, roof repair and fresh exterior paint. This type of FHA 203(k) loan has no minimum repair cost, while the total rehab cost must not exceed $75,000 total.ec-fha-sfhp-handbook

FHA 203(k) loan qualifications and requirements

Requirements to qualify for an FHA 203(k) loan are like those of regular FHA loans. The application process typically includes a credit check, income review and minimum down payment. FHA 203(k) loans can be used to make a wide range of updates, such as:

• Structural alterations and repair
• Resolving health or safety hazards
• Replacing plumbing or roofing
• Aesthetic improvements
• Energy efficiency updates
• Accessibility enhancements

Potential drawbacks and limitations

Rolling the cost of a home repair or improvement into long-term mortgage payments can be an advantage. So, what are the potential drawbacks of using an FHA 203(k) loan? If you’re researching your options, you may want to consider the requirements, closing complications and potential fees of an FHA 203(k) loan:

• Requirements: 203(k) loans often require detailed documentation and multiple points of involvement with the lender. In some circumstances, it may be required that each phase of work and each contractor be approved by the lender’s designated consultant.
• Closing time: 203(k) loans may take longer to approve than traditional mortgages due to their complexity. This can be especially true if there are multiple areas of the home which are being repaired with the disbursement or multiple contractors.
• Fees: Depending on the lender, you may find that a 203(k) loan includes a supplemental origination fee of 1.5% or more of the total loan amount. This can become a significant cost.
• Property limitations: Not all homes will be eligible for a 203(k) loan. Restrictions may vary by area, the type of home, home value and cost of repairs, among other factors.

In conclusion

FHA 203(k) loans can be a way to buy and update a fixer-upper so that it’s move-in ready, without the burden of having cash on-hand for updates. Homeowners can also use an FHA 203(k) loan to roll the cost of repairs and upgrades into a new monthly mortgage. While 203(k) loans have advantages for certain kinds of buyers, owners and situations, there are potential drawbacks. It’s important to keep in mind the restrictions on property types and repairs and consider how lender involvement may affect your timeline and flexibility.