What Is An FHA 203k Loan?
Backed by the Federal Housing Administration (FHA), an FHA 203k loan is a mortgage option that finances the purchase and renovation costs of a home. If upgrades are needed to a home, an FHA 203k renovation loan can help finance that work while helping to keep costs as low as possible. These loans can be used for purchasing or refinancing, and offer lower down payment requirements and lower refinancing interest rates.
How does an FHA 203k loan work?
With funds from an FHA 203k loan, borrowers can choose from a 15- or 30-year fixed-rate loan or a number of adjustable-rate mortgage (ARM) options and can be used for either cosmetic or structural repairs. FHA 203k loan lenders typically offer the loan in two forms: FHA 203k Full/Standard and FHA 203k Limited.
As far as closing costs are concerned, the closing costs on an FHA 203k mortgage are similar to the closing fees on other loans which include appraisal, inspection, and loan origination fees, among others. Different lenders may apply different additional fees at closing.
How to qualify for an FHA 203k loan
FHA 203k loans, much like an FHA purchase loan, offer more flexible qualification requirements compared to other renovation programs. Requirements a borrower needs to meet to qualify for an FHA loan include:
- Must be used to renovate (or renovate and purchase) your primary residence
- The house must meet FHA guidelines and meet minimum property standards
- The house must remain owner occupied
How to apply for an FHA 203k loan
Whether you’ve applied for an FHA loan before or are doing it for the first time, it always helps to know just what you need to apply for an FHA 203k loan. As you prepare to apply for your loan, keep these FHA 203K loan eligibility requirements in mind:
- Two most recent years’ tax returns
- Two most recent years’ worth of verifiable income (W-2s)
- Copy of your driver’s license
- Other verifiable income (child support, alimony, Social Security, etc.)
FHA 203k Full/Standard
An FHA 203k Full/Standard mortgage option is best for modernizing older properties that need structural repairs or a major renovation. Some examples of updates with a Full/Standard FHA 203k loan include bedrooms needing to be remodeled, replacement or repairs to plumbing, roofing and floors, or improving function, appearance, landscaping, energy conservation, health, safety and disabled accessibility.
FHA 203k Limited
The FHA 203k Limited loan is designed to handle smaller projects and cosmetic upgrades that typically have a quicker turnaround. The cost of renovations can be up to $35,000 and can cover minor changes such as:
- Fixing or replacing roofs, gutters, flooring, decks, patios, windows and other similar options
- Update existing HVAC, plumbing or electrical systems
- Remodel or finish a basement or kitchen that doesn’t require structural work
- Painting and weatherizing
- Appliances
- Improving disabled accessibility
The pros and cons of an FHA 203k loan
As with any mortgage, an FHA 203k loan has its own set of pros and cons. As you search for the right mortgage for your homebuying goals, keep these pros and cons of FHA 203k loans in mind:
FHA 203k loan pros:
- Lower credit score requirement
- One loan to purchase and renovate a home
- Lower minimum down payment requirement
FHA 203k loan cons:
- Must be your primary residence for at least a year
- Mortgage insurance may be required
- More repairs may require more paperwork
For a more affordable renovation, talk to a PrimeLending loan officer about an FHA 203k renovation loan.
