FAQS
Down payment: Have a down payment of at least 3.5% of the purchase price and renovation expenses. You must also have a credit score of at least 580.
Property appraisal: Get an appraisal of the property to determine its value after renovations.
HUD-approved consultant: Work with a HUD approved consultant to evaluate the proposed work, review contractor proposals, and monitor the project.
Primary residence: The property must be your primary residence.
Minimum repair amount: Use at least $5,000 toward eligible repairs or improvements.
Completion time: Complete the repairs within six months of the loan closing.
Contingency reserves: Set aside up to 20% of the cost of improvements for unexpected expenses
A 203(k) loan is a mortgage that combines the cost of a property purchase with the cost of renovations into one loan. There are two types of 203(k) loans: limited and standard. Real estate investors and house flippers are not eligible for a 203(k) loan.
To qualify for an FHA 203k loan, you’ll need at least a 3.5% down payment (with a 580 credit score or higher). That means 3.5% of the purchase price plus home renovation expenses. The home will also need to meet HUD’s minimum property standards, which ensure you’re purchasing a safe and habitable property. you’ll need to use a licensed contractor to do the repairs associated with an FHA 203k loan. Occasionally, you may be allowed to DIY renovations, but only if you can prove you have the ability and skills to complete the work. Additionally, you’ll still need estimates from an outside contractor. This is to ensure your bids are accurate. Do not include into the bids any repairs you plan to do yourself, assuming the home will meet FHA guidelines without them. Then, after closing, pay for and complete the work yourself. Keep in mind that some lenders may not allow you to do the work.
With FHA 203k loans — and all FHA loans — you’ll pay what’s called a mortgage insurance premium, or MIP. This is paid both upfront (at closing) and annually. In some cases, MIP can be canceled after 11 years, but only if you made a 10% down payment or higher. However, most people refinance into a conventional loan when they reach 20% equity in the home. And this milestone can be achieved much faster when you do a 203k, thanks to the value you’re adding.
A 203k consultant is essentially a project manager for 203k repairs. They help you file the proper paperwork and keep your project and loan on track while you’re renovating. You do not need a consultant to get approved for a limited 203k loan. But if your construction budget is over $35,000 or you plan to make structural repairs and therefore need a standard 203k loan, you will need to work with a HUD-approved 203k consultant. All standard 203k purchases require consultants.
To find a 203k consultant, you can ask your loan officer for a reference or search HUD’s database for consultants in your area.