What’s a 203(k) Renovation Loan? The Hidden Wonder in Mortgages

Are you a first-time homebuyer? If you are, then you may be overwhelmed trying to figure out the best way to go about getting your home loan. The entire process doesn’t have to be so difficult as long as you have the right mortgage company that can explain all your options in financing to you.


One of those options you may want to consider is a 203(k) renovation loan. This is a great option for first-time homebuyers who may want to consider buying a fixer upper. Let’s go over all the basics of this unique rehab home loan that will get you into the house of your dreams. The Basic Details of the 203(k) Renovation Loan

The overall concept of the 203(k) renovation loan is that it allows you to borrow money to purchase the home AND have the home renovation costs all rolled into one FHA-backed loan. FHA is the Federal Housing Administration, which will insure your loan through a mortgage lender.

Buying an older home that needs a little love can be exciting for some homebuyers. If you have ever watched HGTV, you know how popular it is lately to renovate a home in need. That way, you can sometimes get more house for your money to fix it up into exactly what you want it to look like. You can have the open layout you crave with a big expansive kitchen, put in that extra man cave in a finished basement, or repair other major aspects of the home, like the roof or a broken driveway. You can really purchase a home that has a great foundation for a bargain price and budget your renovation expenses upfront, so you know exactly what you’re getting into loan-wise. This is perfect for people who want a fixer upper, but don’t have the money in savings to throw into an extensive renovation. The Differences Between a Standard or Streamline 203(k) Home Loan

There are two different kinds of 203(k) renovation home loans: a standard or streamline loan. The difference between the two is that the standard version is for more extensive renovations or repairs. This is going to be a large chunk of your mortgage for a house that needs structural damage fixed.

More than likely, during this type of home rehab project, you won’t be able to be in the house while the contractors are working to repair your new house. Some of those projects might include larger landscaping projects, structural repairs, or converting a one-family home into a two- or three-family home unit.

In a streamline loan, the renovation is much less extensive. You may just be making some minor cosmetic changes or fixing up a smaller space, like a master bathroom, or adding some finishing touches to the backyard or kitchen. In this type of loan, you can only request cosmetic repair funds in an amount up to $35,000. There is a very specific list of repairs that qualify under a streamline loan. Some of those include electrical repairs, flooring, painting or appliances.

You’ll know right away when you start looking at older homes that will need some work which loan would be better for that specific house. It’s pretty obvious whether a home will need just a touch of rehab or an entire overhaul. Requirements for FHA Loans

To qualify for a 203(k) FHA loan, you must meet certain standards. Some of the 203(k) loan requirements include the following:

  • A credit score of at least 620

  • Maximum debt-to-income ratio of 41‒45 percent

  • Down payment of at least 3.5 percent

  • You have to live in the property you purchase


Keep in mind you have to qualify, not only for the cost of the house you are buying, but for the renovations’ cost as part of your mortgage. You have to qualify for the entire amount in either a standard or streamline renovation 203(k) loan. Overall, the FHA loan pros outweigh the cons by allowing a homebuyer to purchase a home with a much smaller down payment than most traditional loans. That’s a huge benefit to most first-time homebuyers. How the Renovation Process Works as Part of Your Loan

When you find the house that you ideally want to buy, you also have to get your contractor estimates together to make sure you can pay for the work the home needs. The best piece of advice is to find a contractor who has experience working with people who have used 203(k) FHA rehab loans before. That way, they are completely familiar with the extra paperwork you need in the process of qualifying for the combination loan, which includes the price of the property and the entire renovation.

You want to get a few bids on the project to make sure you are getting the best price for the work. You’ll get to decide in the end whom you want to award the project to, but the mortgage amount will be based on those factors together. The Ultimate Benefits of the 203(k) Renovation Loan

In the end, when you decide to go with a 203(k) renovation loan, you are going to end up being able to buy a house that needs a little bit of care, but you’ll be able to ensure you’re getting exactly what you want done in the end with a stunning renovation.

Your house with the perfect foundation can turn into the home you have been wanting for a long time. Stuart Sanchez is eager to turn your home-buying fears into a calmer reality with just the right home loan. If you want to find out if a 203(k) renovation loan is right for you, give us a call today. We’re more than happy to go over the details to find out if this special “hidden wonder” in mortgage loans will be the perfect option for you. Southwest Funding, Limited Partnership (NMLS #32139) is an equal housing lender. Loan product availability is subject to many factors including loan amount and qualification of borrower. Not every applicant qualifies or is eligible for every loan program. Rate and annual percentage rate (APR) calculated on a 360-day year with typical/normal closing costs. Rates and annual percentage rate (“APR”) are dependent on factors including, but not limited to: loan program selected, credit, collateral, income, assets and overall financial history. Not all applicants will be approved for a loan. All loan programs, terms, and interest rates are subject to change without notice.

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