The Complete Guide to FHA 203(k) Mortgage Loans

Did you know consumer spending on home improvements hit an all-time high at the height of the COVID-19 pandemic? With the need for social distancing over the last few years, most people stayed at home and renovated everything from pools to home gyms. This caused household expenditure on revamping living spaces to reach almost $420 billion despite the economy shrinking by 3.5%!

While the worst of COVID-19 is now behind us, the home improvement trend hasn’t bucked one bit. Growth in home remodeling is expected to peak this year—and this will drive up demand for home loans like FHA 203(k) mortgage loans that are designed to provide financial assistance for people that wish to renovate their homes.

So, are you ready to find out how FHA 203(k) mortgage loans work and what they’re used for?

Here’s a complete guide to FHA 203(k) mortgage loans.

What Are FHA 203(k) Home Loans?

A wall being painted

Imagine renovating and purchasing a home using one home loan. That’s how FHA 203(k) home loans work! FHA 203(k) home loans cover the cost of renovating and purchasing a home under a single mortgage. They’re backed by the Federal Housing Administration and offered on a 15 or 30-year term. Moreover, they’re only obtainable if the cost of the renovations is at least $5,000 and the total value of the property is within the FHA mortgage limit for the area.

How Do They Work?

The easiest way to understand how FHA 203(k) home loans work is by viewing them as “purchase plus renovation” loans. In other words, they’re designed to help people buy and renovate homes simultaneously. For example, if you’re buying a $300,000 fixer-upper and want to spend $200,000 to revamp it, an FHA 203(k) loan for the combined amount of $500,000 will cover all your expenses.

Many people refinance their current mortgage loans toward FHA 203(k) home loans due to the convenience they offer. For instance, suppose you take out a mortgage on a home worth $450,000 but find a better home for only $200,000. You’re confident the new home will look better than the one you currently have if you spend $100,000 to renovate it. In this scenario, you have the option of reaching out to a mortgage refinance company and switching to an FHA 203(k) loan on better terms for the combined purchase plus renovation amount of $350,000.

What Do You Need to Qualify for an FHA 203(k) Loan?

A lady going through documents on a clipboard

The requirements for FHA 203(k)home loans vary depending on the mortgage broker. Most mortgage lenders require applicants to have a credit score of 500 or above. They also require a minimum down payment amounting to 3.5% of the combined value of the home and renovations. However, the lower your credit score, the higher the down payment you’ll be charged. You’ll also be charged higher premiums if your credit score is low because the mortgage broker will attribute a higher default risk to you.

It’s also worth noting that if you’ve undergone a foreclosure in the past three years, you won’t qualify for an FHA 203(k) home loan.

What’s the Maximum Amount You Can Borrow Through an FHA 203(k) Loan?

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If you think there’s no limit to how much you can borrow with an FHA 203(k) loan, think again! FHA 203(k) home loans adhere to the same limits as the FHA’s other home loans. Therefore, the borrowing limit depends on the county and state where the property is situated.

For example, if you’re living in the Niagara County of New York, the loan limit for a one-family home is $420,680. On the other hand, if you’re living in downtown New York, then the loan limit for the same type of home is $970,800! The difference is because the median price of a one-family property in Niagara County is far lower than in New York County.

If you want to find out the FHA mortgage limits for your county and state, check out the FHA mortgage limits calculator.

What Types of Renovations Are FHA 203(k) Home Loans Used For?

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FHA 203(k) home loans are commonly used to make fixer-uppers livable again. In other words, they’re used by homeowners to solidify a property’s foundations and structure. This includes repairing and/or restoring the property’s plumbing, electricity, and water supply. Moreover, the cost of installing energy-saving fixtures like solar panels are covered under FHA 203(k) home loans.

There are also several aesthetic improvements you can make to lift your home’s curb appeal using an FHA 203(k) loan. This includes improvements to the property’s roofing and flooring. Additionally, FHA 203(k) home loans cover the cost of landscaping and any additional changes that will modernize the property’s appearance. But before you start planning your renovations, it’s important to note that luxury fittings aren’t covered by FHA 203(k) home loans. And that brings us to our next section…

What Can’t You Renovate with FHA 203(k) Home Loans?

 A swimming pool

Unfortunately, anything the FHA deems a luxury renovation isn’t covered by FHA 203(k) home loans. Therefore, if you’re thinking of getting a swimming pool or an outdoor fire pit put in, we recommend budgeting for them separately. It’s also worth noting that FHA 203(k) home loans only cover single-purpose properties. Therefore, renovating and purchasing a mixed-use building using an FHA 203(k) home loan isn’t permissible. But how will the mortgage broker know what type of renovations you’re doing?

Unfortunately, if you take out a standard FHA 203(k) loan, a consultant from the US Department of Housing and Urban Development will oversee the renovations at your property. So, if you’re thinking of sneaking in a couple of luxury renovations on an FHA 203(k) loan, chances are you’ll be found out—so don’t risk it!

A dog standing in a house that’s being renovated

Why stress yourself out trying to remember everything about FHA 203(k) home loans when you can hire a licensed mortgage lender to help you? At Atlantic Home Capital, our team of seasoned mortgage consultants in Fort Lauderdale has helped countless clients apply for all kinds of home loans. From no W2 loans for applicants that don’t have income statements to VA loans for soldiers looking to buy property for their families, we do it all!

Find out why we’ve received a ton of positive reviews for our mortgage broker services by reaching out to us today.