FAQ’s 203k Loan

An FHA 203k loan is basically the same as a regular FHA (called a 203b), but with a twist. An FHA 203k loan permits borrowers to include repair/improvement money into their mortgage used to repair, improve, or upgrade their home. With this loan option, borrowers can quickly and easily tap into cash to pay for property repairs or improvements, such as those identified by a 203k Consultant, FHA appraiser or home buyer preferences (see list below). There are two types of FHA 203k Loans: Standard & the Limited. The FHA 203k Standard loan is more like a construction project, and the FHA Limited 203k Loan is for minor improvements.

An over-simplified example:

$200,000 purchase price
+ $75,000 for renovations
= $275,000 loan amount

(3.5% down payment is $9,625)

The purchase of a house that needs repair is often a catch-22 situation, because the bank will not lend the money to buy the house until the repairs are complete, and the repairs cannot be done until the house has been purchased. The FHA 203k loan program can help you with this quagmire and allow you to purchase or refinance a property and include in the loan, the cost of making the repairs and improvements. In addition, the interest on the FHA 203k loan qualifies for the mortgage interest tax deductions like all other mortgage loans. Therefore, the interest that the borrower pays on this “construction” can be all tax deductible! The FHA 203k loan program improves the real estate market because it requires a property to actually be improved….not just purchased. Because of the improvement requirement with the FHA 203k loan program, real estate values are increased, which helps other homeowners in the same neighborhood, invigorates communities and creates work for contractors and commerce is conducted by the purchasing of goods and services. Simply put, the FHA 203k loan program improves everything associated with it.

• people who will occupy the property as their primary residence
• qualified non-profit groups

• Residential Properties such as:
  • Manufactured Home (permanently affixed)
  • Mobile Home (permanently affixed)
  • Single Family
  • Duplex
  • Tri-plex
  • 4-Plex
  • Condos | Townhomes | Patio Homes | Rowhomes
• Mixed-Used Residential
• Residential Conversion - convert a 1-4 unit residential property into any of the listed property types above (example: convert a 4-plex into a duplex or a duplex into a 1-unit)
• Move an existing qualified residential property onto a property

The maximum FHA mortgage limit can be as high as $3.3 Million, but it depends on the property type (1 unit - 4 unit) and where the property is located.

Click here for the FHA Maximum Mortgage Limit for your area, or you may contact your FHA lender for this information.

Limited 203k: $0 minimum – $75,000 maximum* renovation money (effective starting on Nov 4, 2024)
Standard 203k: $5,000 minimum – $3.3 Million maximum* renovation money

*The maximum is the lesser of the FHA Maximum Mortgage Limit for the area, the borrowers approval limit, or 110% of the improved appraised value.

*** NOT AN ALL-INCLUSIVE LIST ***

Most items that add value to or improve the property are acceptable for an FHA 203k Loan. Luxury items such as new swimming pools, BBQ’s, Gazebos, outdoor spas, etc. are not allowed for any 203k loan. However, pool repairs are allowed on any FHA 203k loan.

Examples of allowable repairs/modifications/renovations for the FHA 203k loan (not an all-inclusive list):

• Energy Efficient upgrades (windows, insulation, solar systems, etc.)
• Repair/Replacement of roofs, gutters and downspouts
• Repair/Replacement/upgrade of existing HVAC systems
• Repair/Replacement/upgrade of plumbing and electrical systems
• Repair/Replacement of flooring
• Kitchen remodeling
• Painting, both exterior and interior 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
• Basement waterproofing
• Window and door replacements and exterior wall re-siding
• Septic system and/or well repair or replacement
• Structural repairs/modifications (moving walls, repairing foundations, etc.)

Standard 203k
All work must be inspected by the 203k Consultant or the FHA appraiser prior the contractor receiving each draw/payment.

Limited 203k
Rehab in excess of $15,000, the Lender must perform or obtain an inspection of the completed work by a third party.

Rehab not exceeding $15,000, the Lender is not required to perform, or have others perform, inspections of the completed work. However, the Lender or borrower may choose to obtain or perform inspections if it believes such actions are necessary for program compliance and/or risk mitigation. Lenders may also ensure that the repairs and/or improvements have been completed by obtaining contractor’s receipts or by a signed Mortgagor’s Letter of Completion. If the Lender determines that an inspection(s) by a third party is necessary to ensure proper completion of the proposed repair or improvement item, the Lender may charge the borrower for the costs of no more than two inspections per each contractor. To eliminate the need and cost for an inspection of the completed rehab when not exceeding $15,000, the Lender, at their discretion, may accept receipts or proof of completion of the work to the homeowner’s satisfaction from the contractor.

A contingency reserve is a percentage of the repair/renovation amount (0%-20%) and its purpose is pay for any potential cost overruns or unexpected repair items. A contingency reserve is typically required for the Standard 203k but not required for the Limited 203k, but it is recommended to have a contingency reserve established on all 203k projects.

For the Standard 203k, a HUD-approved FHA 203k Consultant is required

For the Limited 203k. a 203k Consultant is NOT required but strongly recommended. The customer/borrower or the contractor are allowed to include a 203k Consultant even though it's not required. It is always recommended to have a 203k Consultant for all 203k loans, because they can add an extra layer of protection and information that only they can provide. For the Limited 203k, a 203k Consultant can be and should be used for a Feasibility Study and/or for the main purpose of determining the FHA Required Items that must be completed.

CLICK HERE for a list of all 203k Consultants in your area.

Possibly, but because of the liability for the lender allowing a customer to do their own work on a 203k, most (maybe all) lenders will not allow "self-help" on a 203k and will require a contractor to complete the work.

If the customer/borrower wants to do any work or be the general contractor, they must be skilled and qualified to do the work and do it in a timely and workmanlike manner. This means that if you want to do the work yourself or be your own General Contractor, then you MUST have experience for the type of renovations you want to do and meet any licensing requirements. The work must be done in a time frame that meets HUD’s guidelines that will assure the completion of the work agreed upon in the 203k Renovation Loan Agreement.

In the rare event that a "self-help" 203k is approved by the lender, the customer/borrower can only be paid for the cost of the materials… but never the labor, yet the cost of labor and materials and contractor profit must be included in the 203k loan. A contractor estimate is still required, and the loan amount always includes the contractor estimates. Money saved or not spent can be allocated to cost overruns, additional improvements, or a one-time principal loan balance reduction.

The accreditation as a Certified 203k Contractor^® is earned by a contractor who has met the requirements set forth by the 203k Contractor Certification Program, which includes the 203k Contractor Education Course and verification of license, insurance, references, and working capital.

Click Here to learn about the requirements to become a Certified 203k Contractor^®.

In 1995, HUD stopped approving builders/contractors and eliminated the associated database (Mortgagee Letter 95-57). Since then, the 203k Contractor Certification Program has been chartered with the responsibility of educating, vetting, and preparing contractors for the FHA 203k Loan Program.

Earning the accreditation as a Certified 203k Contractor^® is the validation that contractors have been properly educated on the 203k, adequately understand the 203k, and have sufficient working capital to pay the startup costs and ongoing expenses associated with 203k renovation projects.

All Certified 203k Contractors^® will be listed in 203k Contractor Directory, should display the Certified 203k Contractor^® logo on their marketing, and can provide you with a copy of their Certificate of Accreditation.

Go to the 203k Contractor Search page to search for all the Certified 203k Contractors^®.

1. The customer/borrower is responsible for selecting and hiring the contractor
2. The customer/borrower and the contractor cannot have any family relationship and no financial relationship
3. HUD/FHA does not approve, endorse or certify remodeling/general contractors or builders. In 1995, HUD eliminated the database of HUD approved builders/contractors (Mortgagee Letter 95-57). The 203k Contractor Certification Program is chartered with this responsibility.
4. The lender does not approve contractors (see item #1). However, the lender is responsible for determining that the customer's selected contractor is acceptable to do the 203k project in a timely and workmanlike manner and in accordance with HUD’s guidelines by verifying the contractor’s license, insurance, references, credentials, work experience, as well as the contractor’s understanding of and competency with the 203k.
5. The accreditation as a Certified 203k Contractor^® is the verification that the borrower's selected contractor understands the 203k and meets the minimum financial requirements.
6. The Earn Certification page is where contractors go to start the accreditation process.

At the loan closing, the lender places the rehab/improvement funds into an escrow account. The contractors are paid out of this account in a series of draws, most commonly as two-party checks. More detailed information is taught in the 203k Contractor Education Course.

Limited 203k
Contractors receive maximum two (2) payments. Contractors may receive 50% of the material cost as a pre-construction payment, subject to lender approval and only if the contractor proves to the lender that they do not have any money to start the project but may take a few weeks to arrive. Therefore, contractors must has sufficient working capital to pay for the start-up costs and a portion of the ongoing expenses. The final payment is released after 100% of the work has been completed.

Standard 203k
Contractors receive a maximum of four (4) draws/payments plus a 5^th final (for the 10% holdback). There is no upfront money paid to contractors to offset the start-up costs (except for specialty order items with lender approval). Therefore, contractors must have sufficient working capital to pay for the start-up costs and a portion of ongoing expenses with the 203k project (sufficient credit lines with suppliers and subs and/or sufficient capital/reserves is required).

More detailed information is taught in the 203k Contractor Education Course.

The borrower will incur the fees normally associated with an FHA loan (contact your lender and/or real estate agent for more detailed information). In addition, other costs may include:

• One (1) additional origination fee charged by the mortgage lender
• Title update fees charged by the mortgage lender (ensures no contractor liens on the property)
• Fees charged by contractors for 203k Estimates (FHA Compliance Fee)
• Fees charged by 203k Consultants (SOR, WWU, draw inspections, change orders, etc.),
• Slightly higher interest rate (typically 1/4%-1/2% more than traditional FHA loans)
• A 10%-20% contingency reserve (added into the loan amount)

Possibly.
The borrower must occupy the property as their primary residence or be a qualified non-profit group. Since 1996, there has been a moratorium on non-owner occupied investors using the FHA 203k loan.

However, the 203k is eligible to be used on 2–4-unit multi-family dwellings. So, as long as the customer/borrower will occupy at least 1 of the units, the other units can will be rented out, making this a psuedo investor property.

This is the only type of “investor” that can use the FHA 203k Loan.

Yes, a current homeowner can do an FHA 203k Loan by refinancing their existing mortgage into either version of the FHA 203k loan, or in the cases where the property is owned free-and-clear with no existing mortgage, a new FHA 203k Loan can be placed on the property.

To ensure a smooth real estate purchase, these are the recommended steps for an FHA 203k loan:

1. Select an FHA approved lender with verified 203k loan experience
2. Apply for the 203k loan
3. Get a home under contract
4. During the inspection period …
   • On the Standard 203k:
     • Obtain a Work Write-up from a HUD approved 203k Consultant (min $1,000 fee)
     • Obtain a proposal from a Certified 203k Contractor^®
     • Order the appraisal to determine the As-Is and Subject To (ARV) values
   • On the Limited 203k:
     • Option 1 (best option)
       1. Obtain a Work Write-up from a HUD approved 203k Consultant which identifies all FHA required items ($1,000-$1,200 fee)
       2. Obtain an from a Certified 203k Contractor^® based on the WWU from the 203k Consultant
       3. Order the appraisal to determine the As-Is and Subject To (ARV) values
     • Option 2 (cheapest option)
       1. Obtain an estimate from a Certified 203k Contractor^® (may pay an FHA Compliance Fee)
       2. Order the appraisal to identify all FHA required items & determine the As-Is and Subject To (ARV) values
       3. When the appraisal report lists FHA required items not included in the contractor's estimate, the Certified 203k Contractor^® must redo their estimate
       4. Borrower must send the lender the revised estimate hoping it still qualifies for the Limited 203k. If it does, proceed to Step 5 below
       5. If the revised estimate no longer qualifies for the Limited 203k, the process must restart with the Standard 203k Process listed above
   • On both versions, the 203k Consultant’s work write-up, the contractor’s estimate, and the appraisal are sent to the lender for approval.
5. Buyer pays down payment
6. the 203k loan closes
7. 203k rehab money is placed in an escrow account to pay for the renovations and any allowable mortgage payments.
8. You now own the home (or refinance is complete) and renovations can begin.

The FHA 203k Loan is available in all 50 US States and all US Territories.

Call the 203k Help Desk at (855) CALL-203K (855-225-5203) or go to the Contact page to submit a request form, which will be responded to within 1 business day.