FHA 203k Basics
If you want to buy or refinance a home that needs work, FHA 203k may help. Sometimes called ‘rehab’ or ‘fixer’ loans, FHA 203k provides funding for the home as well as any improvement projects. Instead of getting two loans, you bundle everything together.
Advantages and Disadvantages
There are a few reasons to look at FHA 203k. The loan may reduce costs and paperwork because you only get one loan (as opposed to a home loan and a home improvement loan). Rates are competitive, and you can buy a home that banks might otherwise not provide funding for.
- More details: Benefits of 203k Loans
As with any loan, there are costs and restrictions, and FHA 203k has its own unique set. You should expect closing to take 45 to 90 days.
- More details: FHA 203k Loan Costs and Pitfalls
How FHA 203k Works
The loan can pay for a home as well as eligible improvements. FHA 203k is designed for one to four unit properties, but condo and townhome owners can use the program for interior projects.
The maximum loan depends on location, and FHA 203k allows up to 110% of the home’s projected value after improvement. The minimum loan is $5,000. However, the Streamlined FHA 203k allows you to do smaller projects (with an easier process). Funds for improvement projects go to an escrow account and are paid out as work is completed.
Work must be finished within 6 months of closing. There is a little extra 'padding' in case projects cost more than expected, but you cannot borrow more through FHA 203k after you’ve used the excess. Work with a reputable contractor who provides accurate estimates.
Loans may be fixed rate or adjustable rate mortgages with 15 or 30 year terms, and rates are slightly higher than traditional FHA loans. FHA 203k is not available to investors, but owner/occupants and nonprofits can use them.