An FHA home improvement loan aka Federal Housing Administration home loan aka FHA203(k) is a type of loan that makes the home renovation process easier for homeowners. It allows you to borrow money for both your home purchase as well as your home renovation costs through a single loan.

FHA203(k) loans are backed by the Department of Housing and Urban Development (HUD) and are a great loan option for those who are looking to buy a home and get major upgrades, repairs or home remodeling done.

If you’re thinking of purchasing a fixer-upper or making home improvements in your existing abode, this loan may be the perfect rehab loan for you. It seamlessly combines your home mortgage with your renovation costs. That is to say, instead of multiple loans, there will be one convenient loan and one payment for both your mortgage loan and home remodeling.

If you don’t qualify for a conventional home equity loan or home equity line of credit because you have no home equity, and are in the low- to moderate-income homeowners finance, the FHA loan could help you with critical repairs to make your home more livable. 

It’s a kind of insurance made by the government to the private lenders so that they can lend money to such homeowners. The loan is usually a fixed-rate loan with terms of 10, 15, 20, or 30 years.

Types of FHA home improvement loans

There are two types of 203(k) loans: the Limited K and the Standard Consultant K.

While the limited 203(k) loan is specific to homes that do not require structural repairs, the standard loan is for houses that need foundational repairs, and the repair work will be in excess of $35,000. 

Limited 203(k) loan Standard 203(k) loan
Loan amount for remodeling is less than $35,000Loan amount for remodeling is in excess of $35,000
Only for minor home improvements, not luxury or structural improvementsFor extensive renovations and room additions
Repairs must begin within 30 days of closing loan and finished within six monthsYou will have get your renovation evaluated by an HUD-approved 203(k) consultant 

How to qualify for a 203(k) loan?

loan application

FHA loans allow you to buy a home with a smaller down payment — as little as 3.5 percent of the total loan amount (including the cost of the house and renovation). According to the Department of Housing and Urban Development, a homeowner must meet certain eligibility requirements for an FHA203(k) home loan.

  • A credit score of at least 580 for 3.5 percent down payment (many lenders require a score of 620 or higher)
  • An upfront mortgage insurance payment of 1.75 percent of the total loan amount.
  • A monthly mortgage insurance premium depending on the loan-to-value ratio and length of the mortgage.
  • A debt-to-income ratio of less than 43 percent
  • A total loan-to-value ratio of less than than 80 percent
  • Adequate income to repay the loan.
  • A U.S. citizenship or lawful permanent residency who hasn’t defaulted on their federal student loan or income taxes. 

FHA home improvement loan rules

While 203(k) loans simplify the process of refinancing as well as purchasing a house, there are some restrictions and rules that you need to follow.

You must be the owner or occupant of the property you’re seeking the loan for. And, it must be your primary home. Investors are not eligible for an FHA loan.

Furthermore, you must be at least two years out of bankruptcy and at least three years removed from any foreclosures. You need to demonstrate that you are working toward re-establishing a good credit score. 

Once the loan closes, the renovation work must begin within 30 days and be completed within six months. When the renovations are complete, a HUD-approved cost consultant will conduct an evaluation.

Both the contractor and the mortgage borrower should be familiar with the loan program, especially the payment schedule and requirements.

Make sure that the contractors you hire are familiar with all the terms and conditions of an FHA home improvement loan.

Which home projects qualify for FHA loans?

203k loan for a kitchen remodel

Keep in mind that you will qualify for 203(k) financing only if the property is your primary place of residence. Since the loan program limits the projects to structural alterations and improvements to the home’s function, there are only certain works that qualify under an FHA loan.

Here are some of the home improvements that you can finance with a 203 (k) loan:

Keep in mind that luxury projects, such as a hot tub or swimming pool installation, do not qualify for 203(k) financing.

How long does it take to close on an FHA loan?

Once you’ve picked your ideal home and signed the deal with the home seller, the lending process might take anywhere from two/three weeks to two/three months — depending on many variables, including underwriting. The time frame also depends on how efficient your loan officer, processor, and underwriter are.

Downside of FHA loans

While an FHA loan is a great home renovation loan choice, there are some disadvantages too. The borrower has to make an upfront MIP payment of 1.75% of the loan amount. They must also pay an annual premium (that’s about .85% of your loan) for the entire life of their mortgage. 

What is an FHA cash-out refinance?

aha cash-out refinance

If your home renovation doesn’t qualify for a 203(k) loan, or if you don’t want to borrow a minimum of $5,000 for home upgrades, there’s another option for you — FHA cash-out refinance.

You can get a bigger FHA loan and use it to pay off your current mortgage. The cash difference is paid to you with which you can remodel your home.

If you’re looking for low FHA cash-out refinance interest rates, consult an FHA lender about your eligibility and FHA cash-out refinance rates.

Bottom line

Whether you’re a long-time homeowner or a first-time home buyer looking for affordable financing to buy, remodel, or repair your home, FHA loans are a great loan option. 

The loan lets you buy a home and remodel it in the same loan transaction. You can utilize the loan to customize to your needs and get the home of your dreams!

FHA Home Improvement Loan was last modified: January 28th, 2022 by Ramona Sinha
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