Man working on his house with his dog nearby.

Step-by-Step Guide to FHA 203(k) Loans

Sometimes when looking at homes, you find one that needs a little—or a lot—of TLC to make it right for you. In the world of real estate, unlike in relationships, setting your heart on a fixer-upper home holds many advantages for the buyer.

Not only do you get the home for less, you can renovate it to suit your needs and tastes. And it can be a great way to get an affordable home in a more aspirational neighborhood. A renovation loan is the financial tool that can make it happen.

Renovation loans offer a number of other benefits over traditional methods of financing, such as:

  • Avoid depleting your savings or maxing out your credit cards to pay for repairs and upgrades.
  • By combining your mortgage and your remodeling loans, you simplify your monthly bill payment and may lower your interest rate.
  • Claim a larger tax deduction by combining renovation and mortgage interest.
  • Build equity faster by increasing the value of your home.
  • Add to your home’s value when you decide to sell.

FHA 203(k) Loans

One of the most popular renovation loans is the FHA 203(k). Insured by the Federal Housing Administration, FHA 203(k) loans are backed by the government, making them a good choice for buyers who need a low down payment or have less-than-stellar credit. Available in Limited and Standard options, they can be used to purchase a one- to four-unit family home, individual or site condominium unit, or a mobile or manufactured home.


  • 3.5% minimum down payment option
  • Lower credit score requirements
  • No income limits
  • A low $5,000 minimum on renovation costs
  • Gifts allowed
  •  Seller contributes of up to 6% of the purchase price
  • 15- to 30-year term with fixed interest rate


  • Requires Mortgage Insurance Premium which can be rolled into the monthly loan payments
  • Must be an owner-occupied, primary residence

A Limited FHA 203(k) loan covers minor, non-structural repairs and upgrades up to $35,000 with a minimum cost for renovations of $5,000.

A Standard FHA 203(k) loan requires that a HUD-approved 203(k) consultant work with you and the contractor to ensure that all required renovations are made and payments are disbursed on-schedule. You will need to select the Standard loan if your home needs major rehabilitation work, structural repairs, landscaping or renovations exceeding $35,000. You cannot use the Standard loan to purchase or renovate any luxury item or make improvements that are not a permanent part of the property.

Allowed Improvements:

  • Repair/replace roofs, gutters, and downspouts
  • Repair/replace/upgrade existing HVAC systems
  • Repair/replace/upgrade plumbing and electrical systems
  • Repair/replace flooring
  • Minor remodeling, such as kitchens and bathrooms not involving structural repairs
  • Painting, interior and exterior
  • Weatherization, including storm windows and doors, insulation, weather stripping, etc.
  • Purchase and installation of appliances, including free-standing ranges, refrigerators, washers/dryers, dishwashers and microwave ovens
  • Accessibility improvements for persons with disabilities
  • Lead-based paint stabilization or abatement of lead-based paint hazards
  • Repair/replace/add exterior decks, patios, porches
  • Basement finishing and remodeling not involving structural repairs
  • Basement waterproofing
  • Window and door replacements and exterior wall re-siding
  • Septic system and/or well repair or replacement

Refinancing with a 203(k) Loan

If you want to renovate the home you already have, a 203k loan can also be used to refinance and raise cash for home improvements. Best of all, you can refinance for up to 97.75% of the projected value of the home after renovations are completed. Then, use the difference between your existing mortgage balance and the new loan amount to make your home improvements—after paying closing costs and certain 203(k) fees.

203(k) Loan Restrictions

Renovation loans do present some guidelines and limitations for the prospective home buyer. For example, you must use licensed contractors for any structural, electrical or plumbing renovations. So there’s no cutting corners by hiring your part-time handyman buddy or doing it yourself. You can only have one general contractor overseeing the work on your home. And you and your contractor must abide by a set payment schedule.

Four Steps to Success

Think you’re ready to buy or refinance and renovate? USA Mortgage recommends taking these first steps to ensure your Renovation Loan process is as smooth and rewarding as possible:

  1. Know your budget and get pre-qualified. Talk with a USA Mortgage banker to determine your total purchase price eligibility—total purchase price = sales price + renovation bid + 20-35% of the bid.
  1. Narrow your search. Look at homes that meet your requirements for lot size, location, and unit count. Bridge the market options and your home renovation goals with a bid from a contractor you trust.
  1. Prepare for underwriting. Once your offer and bid are finalized, allow time for your mortgage to be processed and underwritten. Don’t make changes to the scope of work or your chosen contractors while your loan is under review.
  1. Close the loan, and start your renovations. With your and your lender’s approval, your contractor may be eligible to receive some funds as early as loan closing to help get the project underway. You will receive a draw welcome letter once your renovation escrow account is ready for disbursing payments to your general and sub-contractors.

To apply for an FHA 203k renovation or refinance loan, start here. Or contact a USA Mortgage loan originator to help you explore all of your options.

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