Skip to main content
Renovation Loan Program

FHA 203(k) Loans

Learn More

What is an FHA 203(k) Loan?

FHA 203(k) loans allow home buyers to purchase properties and include costs for home improvement for as little as 3.5% down. They also allow homeowners to refinance existing properties and include costs for home improvement.  There are two types of FHA 203(k) loans:

FHA 203(k) Standard loans are designed for major remodeling and renovation projects.  There is a minimum repair cost of $5,000 and the use of a HUD Consultant is required.

FHA 203(k) Limited loans are designed for minor remodeling and renovation projects.  Structural repairs are not allowed. No minimum repair cost is required, but total renovation costs, fees, and reserves may not exceed $35,000 unless the subject property is in a Qualified Opportunity Zone (QOZ). In QOZs, renovation costs, fees, and reserves may not exceed $50,000. The use of a HUD Consultant is not required.

What properties are eligible for a FHA 203(k) Loan?

Any property financed by FHA 203(k) loans must be or become your primary residence. The property must also be an existing property that has been completed at least one (1) year. If unsure of the completion date, you may request a copy of the Certificate of Occupancy (“COE”), or its equivalent.

Eligible properties include:

  •  1-4 units
  • Historical Properties (require approval for repairs from governing historical society)
  • HUD REO
  • Modular homes
  • Planned Unit Developments (“PUD”)
  • Townhome
  • Warrantable Condo
Mortgage Loan

What improvements are allowed with an FHA 203(k) Loan?

You can choose which repairs you would like to finance, but it is important to note that all appraiser-noted deficiencies and repairs that are required to meet HUD’s Minimum Property Requirements (“MPR”) must be addressed. Eligible improvements vary depending on which type of FHA 203(k) loan you are using.

Eligible improvements for FHA 203(k) Standard loans include:

  • Converting a one-family Structure to a two-, three- or four-family Structure
  • Decreasing an existing multi-unit Structure to a one- to four-family Structure
  • Reconstructing a Structure that has been or will be demolished, provided the complete existing foundation system is not affected and will still be used
  • Repairing, reconstructing or elevating an existing foundation where the Structure will not be demolished
  • Purchasing an existing Structure on another site, moving it onto a new foundation and repairing/renovating it
  • Making structural alterations such as the repair or replacement of structural damage, additions to the Structure, and finished attics and/or basements
  • Rehabilitating, improving or constructing a garage
  • Eliminating health and safety hazards that would violate HUD’s Minimum Property Requirements (MPR)
  • Installing or repairing wells and/or septic systems
  • Connecting to public water and sewage systems
  • Repairing/replacing plumbing, heating, AC and electrical systems
  • Making changes for improved functions and modernization
  • Making changes for aesthetic appeal
  • Repairing or adding roofing, gutters and downspouts
  • Making energy conservation improvements
  • Creating accessibility for persons with disabilities
  • Installing or repairing fences, walkways, and driveways
  • Installing a new refrigerator, cooktop, oven, dishwasher, built-in microwave oven, and washer/dryer
  • Repairing or removing an in-ground swimming pool
  • Installing smoke detectors
  • Making site improvements
  • Landscaping
  • Installing or repairing exterior decks, patios, and porches
  • Constructing a windstorm shelter
  • Covering lead-based paint stabilization costs, if the Structure was built before 1978, in accordance with the Single Family mortgage insurance lead-based paint rule (24 CFR 200.805 and 200.810(c)) and the U.S. Environmental Protection Agency’s (EPA) Renovation, Repair, and Painting Rule (40 CFR 745, especially subparts E and Q)

Eligible improvements for FHA 203(k) Limited loans include:

  • Eliminating health and safety hazards that would violate HUD’s MPR
  • Repairing or replacing wells and/or septic systems
  • Connecting to public water and sewage systems
  • Repairing/replacing plumbing, heating, AC and electrical systems
  • Making changes for improved functions and modernization
  • Eliminating obsolescence
  • Repairing or installing new roofing, provided the structural integrity of the Structure will not be impacted by the work being performed; siding; gutters; and downspouts
  • Making energy conservation improvements
  • Creating accessibility for persons with disabilities
  • Installing or repairing fences, walkways, and driveways
  • Installing a new refrigerator, cooktop, oven, dishwasher, built-in microwave oven and washer/dryer
  • Repairing or removing an in-ground swimming pool
  • Installing smoke detectors
  • Installing, replacing or repairing exterior decks, patios, and porches
  • Covering lead-based paint stabilization costs (above and beyond what is paid for by HUD when it sells REO properties) if the Structure was built before 1978, in accordance with the Single Family mortgage insurance lead-based paint rule and EPA’s Renovation, Repair, and Painting Rule

No matter which FHA 203(k) loan you are using, the following are ineligible improvements:

  • New construction from the ground up
  • Any work performed or materials purchased prior to closing
  • Recreational or luxury improvements are not allowed, such as: installation of new swimming pools (existing swimming pools can be repaired), an exterior hot tub, spa, whirlpool bath, or sauna, barbecue pits, outdoor fireplaces or hearths, bath houses, tennis courts, satellite dishes, tree surgery (except when eliminating an endangerment to existing improvements), photo murals, gazebos
  • Making additions or alterations to support commercial use or to equip or refurbish space for commercial use is not allowed
  • Repair or improvements that are expected to require more than six months to complete are not allowed
  • Improvements or changes made to the initial scope of work as identified in the HUD Consultant’s WWU and/or contractor’s bid that were not pre-approved by Diamond Residential Mortgage Corporation in advance may not be eligible for reimbursement

What are the FHA 203(k) Loan Appraisal Requirements?

As-Is Appraisal

  • For purchases, an as-is appraisal is typically not required unless the seller has owned the property for less than 180 days and an as-is appraisal is required to comply with HUD’s Property Flipping guidelines.
  • For refinances, an as-is appraisal is not always required but may be helpful if you intend to finance closing costs and pre-paid items like homeowner’s insurance, property taxes, and/or pre-paid interest due at loan closing.

After-Improved Appraisal

An after-improved appraisal is required for every FHA 203(k) loan.

Mortgage Loan

What are the FHA 203(k) Loan Financeable Renovation Costs?

  • A contingency reserve will be funded to cover unforeseen repairs that are discovered during renovation. The amount of contingency will vary between 10%-20% of the bid amount. Contingency reserves are required and typically financed in the loan amount (i.e., Financed Contingency). Alternatively, you may bring funds to closing to fund the contingency reserves; however, any assets required to fund the contingency reserves must be documented and verified above the amount required for down payment and reserves (i.e., Borrower-Funded Contingency)
  • Hard costs (i.e., labor and materials from the contractor’s bid)
  • Architectural fees (FHA 203(k) Standard only)
  • Engineering fees (FHA 203(k) Standard only)
  • Consultant fees (FHA 203(k) Standard only)
  • Draw inspection fees
  • Title update fees
  • Permit costs
  • Feasibility Study (FHA 203(k) Standard only; Diamond Residential Mortgage Corporation will not require this)
  • Mortgage Payment Reserves (FHA 203(k) Standard only) not to exceed six (6) months’ principal, interest, property taxes, and homeowner’s insurance payments, depending on the length of time the property will be uninhabitable during renovation

Other Highlights of the FHA 203(k) Renovation Loan

 

  • You can use up to 110% of the property’s after-improved value to structure your loan
  • An Up-Front Mortgage Insurance Premium (“UFMIP”) will be financed into your loan. In addition, a monthly mortgage insurance premium will be included in your monthly payment
  • Your contractor’s credentials will be vetted. Any contractor hired will have to provide proof of licensing (if required), a Certificate of Liability Insurance, Worker’s Compensation (if required), any specialty certifications required (e.g., lead-based paint, mold, radon, asbestos), and a signed IRS W-9 Form
  • Your contractor’s bid has to meet certain requirements such as being on contractor letterhead, naming you as the client, identifying the property where the work will take place, a full description and the location of all work being performed, a labor and materials breakdown per line item, permits and their associated costs, accurate tally of all sub-totals and the grand total, start and completion dates, and number of draws needed. If the property will be uninhabitable during renovation, the contractor should indicate so and let us know how long the property will be uninhabitable. For FHA 203(k) Limited loans, the contractor must specifically state all repairs being performed are non-structural in nature
  • You may not be related to or have a business relationship with the contractor or any other party in the transaction. There is only one exception: you may be related to the seller
  • No other parties in the transaction may be related to one another or have a business relationship with one another
  • You may be able to perform some of the work yourself. To find out whether or not you would be allowed to perform work, contact me
  • Gifts are allowed on purchases and some down-payment assistance programs are allowed as well
  • FHA 203(k) loans may be combined with HUD’s $100 Down HUD REO program, Good Neighbor Next Door program, or HUD’s Energy Efficient Mortgage (“EEM”)
  • All permits should be pulled immediately after loan closing, work should commence within thirty (30) days’ of loan closing, work should not cease for any thirty (30) day period, and must be completed within six (6) months of loan closing

Draw Process of the HomeStyle Renovation Loan

 

According to HUD, below is a list of items that may be disbursed at loan closing.

FHA 203(k) Standard 

  • Permit costs (permits must be obtained before work commences)
  • Prepaid architectural or engineering fees
  • Prepaid Consultant fees
  • Origination fees
  • Discount points
  • Materials costs for items, prepaid by the Borrower in cash or by the contractor, where a contract is established with the supplier and an order is placed with the manufacturer for delivery at a later date; and/or
  • Up to 50 percent of materials costs for items, not yet paid for by the Borrower or contractor, where a contract is established with the supplier and an order is placed with the manufacturer for delivery at a later date

FHA 203(k) Limited

  • Permit fees (permits obtained before work commences)
  • Origination fees
  • Discount points
  • Up to 50 percent of the estimated materials and labor costs before beginning construction only when the contractor is not willing or able to defer receipt of payment until completion of the work, or the payment represents the cost of materials incurred prior to construction. A statement from the contractor is sufficient to document

The remaining draw process for each loan program is as follows:

FHA 203(k) Standard

  • Up to 5 draws are allowed
  • A 10% percent holdback is required for each progress draw; the total of all holdbacks will be released in the final draw
  • The HUD Consultant will perform an inspection prior to every draw, including the final inspection, and prepare Draw Request Form HUD-9746-A

FHA 203(k) Limited

  • Remaining 50% of bid amount will be released after all work has been completed
  • Final inspection will be performed by the original appraiser or an eligible HUD Consultant

There are many different types of renovation loans: conventional renovation loans through Fannie Mae® (“FNMA”) and Freddie Mac® (“FHLMC”), FHA renovation loans, USDA renovation loans, a VA renovation loan option, and portfolio renovation loans.

Below is a high-level overview of the renovation loans Diamond Residential Mortgage Corporation offers. For more information, explore FAQs and Blog.

Keys To Success:

  • Inquire early! If you attempt to place an offer on a property that is listed for sale without a pre-qualification letter, your offer may be rejected and you may miss a window of opportunity. It is best to secure financing before you are too far into the buying process.
  • Make sure your contractor is on board with the contractor qualifications, bid requirements, and draw process required for your loan type.
  • If a Consultant is involved, meet together at the property with the contractor, so all parties can finalize the scope of work together.
  • Provide requested paperwork quickly to meet contract deadlines. Time lost on the front end of a deal oftentimes cannot be made up on the back end of the deal to hit closing deadlines.
  • Be decisive!  Decide on the details of your renovation project early and resist the temptation to make changes throughout the loan process. Wavering during the process can cause delays with your closing. Feel confident in pushing forward with the decisions you make at the onset of the transaction. That’s not to say you can’t make changes along the way, but making those changes mid-stream will likely cause delays.

HomeStyle® Renovation Loans

Learn More!

HomeStyle® Energy Loans

Learn More!

FHA 203(k) Loans

Learn More!

USDA Rehabilitation & Repair Loans

Learn More!

VA Alterations & Repairs Loans

Learn More!

RenoRefresh Second Mortgage

Learn More!

How the renovation mortgage process works

1

Get pre-approved

2

Go under contract for the purchase of a home

3

Find contractor

4

Get bid

5

Work with Consultant (if/when applicable)

6

Appraisal is ordered

7

Loan is submitted to underwriting

8

Close loan

9

Begin renovations