What Is an FHA Remodel Loan? And What’s Involved if I Want to Renovate?

What Is an FHA Remodel Loan? And What's Involved if I Want to Renovate?

Sometimes, the perfect home isn’t brand new — it’s a fixer-upper. If you’ve found your new home but it needs some work, look no further than the FHA 203k renovation loan. Also known as the FHA remodel loan, this mortgage allows you to fund the purchase of your home and any necessary renovations at the same time.

With that in mind, below is a guide to the FHA renovation loan. Read it over so that you can determine whether or not this type of loan might be a good fit for you.

What is an FHA 203k loan?

At its core, an FHA 203k loan is a loan that allows you to buy a home and make renovations to it. However, unlike most other loans, which cover either the cost of the mortgage or the cost of the renovations, this loan allows you to roll both into a single monthly payment.

As the name suggests, this is also an FHA-insured loan, which means that it’s backed by the Federal Housing Agency. The FHA loans often allow for more lenient qualifications. However, before opting for a 203k, it is important to understand how the process works.

How does an FHA remodel loan work?

An FHA remodel loan allows you to roll the cost of remodeling into your loan balance once you settle on the home or refinance it. You are then responsible for paying off the cost of both the home and the remodel with your mortgage payments.

However, the actual process of applying for a 203k loan is a bit more complicated. It goes like this:

  1. Find a home: Specifically, the home should be a fixer-upper that you intend to buy or it can be your own home that you’re refinancing and remodeling.
  2. Apply for a 203k loan: In addition to meeting all the standard lender requirements, you also need to have an idea of the types of renovations you intend to make to the property.
  3. Hire a contractor: The contractor will draw up a schedule and budget for the project, which will go to the mortgage lender.
  4. Conduct an appraisal: In this case, the appraiser will determine the after-renovation value of the home in order to determine how much money you can borrow for the renovations.
  5. Go through underwriting: Your lender will likely require more information from you and your contractor in order to approve you for the loan.
  6. Close on the home: At settlement, your lender pays the seller what they are owed and keeps the rest for money in escrow.
  7. Renovate: After you own the home, your contractors will start renovating. When they are done, your lender will use the money that’s in escrow to pay them.
  8. Move-in: At this point, you can sit back and enjoy your newly renovated home.

Is there more than one type of FHA remodel loan?

Most buyers do not realize that there are two separate types of FHA remodel loans. If you’re unsure which type is right for you, ask your lender. In general, it will depend on the scope of the renovations that you intend to make to the home.

Full FHA 203k

The full FHA 203k loan allows you to borrow up to 110% of the after renovation value of the home. Ask about this type of loan if you intend to make major structural changes to the home or doing any of the following:

  • Re-configuring the layout of the home
  • Eliminating existing health and safety hazards
  • Putting in plumbing, HVAC, or electrical systems
  • Replacing roofing, gutters, or downspouts
  • Landscaping work
  • Installing energy conservation systems

FHA Limited 203k

Meanwhile, an FHA limited 203k loan allows you to borrow up to $35,000 in all areas, with up to $50,000 possible in a HUD-qualified Opportunity Zone. With the Opportunity Zone, the property has to be in certain neighborhoods and only the first 15,000 applications received from those zones get a chance to go to the $50,000 amount.

In the case of the FHA limited 203k, the focus should be on projects that do not require making changes to the structural aspects of the property. They can include:

  • Kitchen and bathroom remodels
  • Repairing roofing, gutters, or downspouts
  • Upgrading or replacing an existing HVAC system
  • Interior and exterior painting
  • Weatherization
  • Getting new appliances
  • Making accessibility changes to the home for persons with disabilities

What are the FHA renovation loan requirements?

In general, the requirements to be approved for an FHA renovation loan are much the same as being approved for any type of FHA loan. You should expect to have to meet the following qualifications:

  • An acceptable credit profile
  • You should aim to have a debt to income ratio of less than or equal to 43%
  • You will need a down payment that is equal to 3% – 5% of the total cost of your home and renovations. However, be aware that your down payment and closing cost requirements may vary by loan type
  • In addition, the property must meet certain requirements in order to be approved for an FHA loan
  • The after-renovation value of the home must support the mortgage amount

Considering an FHA 203k renovation loan?

Whether you’re buying a fixer-upper right now or you’d like to renovate your current home, an FHA 203k loan could be a smart option for you. Contact one of our mortgage specialists today — we’re here to help!

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Tara Mastroeni

Tara Mastroeni is a real estate and personal finance writer. She has a BFA in Media Production from Emerson College. Her work has been published on websites such as Forbes, Business Insider, and The Motley Fool. She has also been featured as a subject matter expert on Innovators with Jane King and the American Trends podcast. Find her at TMRealEstateWriter.com or on Twitter at @TaraMastroeni.