FHA 203K Loans-Renovation Mortgage Loan Guidelines

This guide covers FHA 203k loans for homebuyers and homeowners that need to renovate their homes. FHA loans are government-insured mortgage loans issued by private lenders. FHA is not a mortgage company, nor does it fund any mortgage loans. The United States Department of Housing and Urban Development (HUD) is the parent of FHA. HUD, the parent of FHA, insures owner-occupant residential home loans to private mortgage lenders. Lenders need to be approved by HUD. John Strange, a senior loan officer of Mortgage Lenders for Bad Credit and an associate contributing editor for GCA Forums, says the following about FHA 203k loans:

There is no other renovation mortgage loan program that is an acquisition and renovation with a one-time closing and is more beneficial to a borrower than FHA 203k loans. The renovation loan program is guaranteed and insured by HUD, and one to four unit homes are eligible.

HUD-approved mortgage lenders need to follow the minimum HUD agency mortgage lending guidelines. FHA loans are the most popular loans in the United States. This is due to the fact that it only requires a 3.5% down payment for homebuyers. There are two types of guidelines on FHA loans. The first is that all mortgage lenders need to meet the minimum HUD 4000.1 FHA Handbook Guidelines in order to be insured by HUD in the event the borrower defaults on their FHA loan. The second FHA guidelines is the lender overlays. Lender overlays are each lender’s specific guidelines above and beyond those of HUD agency guidelines.

Why Are FHA 203k Loans So Popular

Homebuyers or homeowners with a minimum of a 580 credit score are eligible to purchase a fixer upper with a 3.5% down payment of the after-repair value of the home. FHA 203k loans are acquisition and renovation loans all in one, where once the renovation is done, it converts to a 30-year fixed-rate FHA 30-year term loan. FHA loans have flexible mortgage lending guidelines with regards to the following:

• Credit
• Debt-to-income ratios
• Collections and charged-off accounts
• Prior bankruptcy and foreclosure
• FHA loans allows multiple non-occupant co-borrowers

Any property from condominium units, townhomes, and manufactured homes to stick-built single-family homes and two to four-unit multi-family homes are eligible for FHA 203k loans. In this guide on FHA 203k loans, we will cover and discuss qualifying for FHA 203k loans to renovate an owner-occupant home that needs renovation.

HUD Property Condition Guidelines on FHA Loans

HUD has strict guidelines when it comes to appraisals and property conditions. A person cannot qualify to purchase a property that is in need of repairs or not habitable. The property needs to meet general FHA guidelines. HUD requires that the subject property be in habitable condition. HUD Guidelines are very strict with regards to the following:

• Peeling paint
• Broken windows
• Non-working electrical, plumbing, and HVAC systems
• Other defects in the property

HUD Guidelines on Defects On The Subject Property

If a home appraiser notes defects in the property, the appraiser will note it on a home appraisal report:

• The home buyer and/or home seller needs to correct the issues
• A re-inspection needs to be done before the mortgage lender can accept the appraisal and go forward with the mortgage application and approval process
• In the event, if the defects are very minor, then it presents no issues, an appraisal re-inspection can be done and the mortgage application and approval process can move forward
• However, if the home has major issues, such as needing the following:
• new roof
• new windows
• new flooring
• new HVAC systems
• new appliances
• other major repairs
• Then the home buyer has the option of getting FHA 203k Home Loans

What Are FHA 203k Loans?

FHA 203k Loans are acquisition and construction loans that are combined as a one-loan package and one loan closing.

• Everyone who qualifies for the standard FHA loan program can qualify for FHA 203k loans.
• There are Streamline FHA 203k loans, which are for cosmetic repairs, and the maximum construction budget is capped at $35,000.
• Standard FHA 203k loans have no construction limit, but the acquisition and construction loan are capped at the maximum FHA Loan Limit of the county in which the property is located.

Basics Of FHA 203k Loans

• The Federal Housing Administration does not fund loans.
• The Federal Housing Administration insures owner-occupant home loans to private lenders.
• The purpose of HUD is to promote private lenders to fund higher-risk home loans for buyers.
• HUD will guarantee these FHA-approved mortgage lenders against losses in the event borrowers defaults

The basics of FHA 203k Loans is to enable the homebuyer to purchase non-habitable properties in need of repairs

• Homes that will not pass FHA housing standards or fixer-uppers are perfect for FHA 203k Loans.
• Enables home buyers to purchase a home that is in need of repairs.
• FHA 203k Loans enable a home buyer to purchase a fixer-upper.
• FHA 203k Loans will not only fund the cost of the home but also the cost of the repairs, all in one loan closing.
• FHA 203k Loans also enable a homeowner who has a home that needs rehabilitation to refinance their current home and get the funds to remodel their homes.

Types Of Work Allowed With FHA 203k Loans

There are two types of FHA 203k home loans:

• Streamline FHA 203k loans, which are for minor cosmetic repairs such as:
• Windows
• Siding
• Interior remodeling
• Roofing
• Basements and attics
• Appliances
• HVAC
• Millwork and Flooring
• General repairs not needing structural changes to the home
• Maximum budget of $35,000

Standard FHA 203k Loans, which allow full construction with no construction budget:

• Room additions
• Basement and attic remodeling
• bathroom and kitchen remodeling
• New roofing
• new windows
• New gutters
• Electrical systems
• Plumbing systems
• HVAC systems
• Appliances
• Other major repairs can be funded with FHA 203k Home Loans
• All FHA 203k Loans need to be an owner-occupant
• Properties eligible are one- to four-unit residential properties

FHA 203k Streamline Loans

There are two different types of FHA 203k loan programs:

• FHA 203k Streamline and FHA 203k Standard
• The FHA 203k Streamline program is a simple remodeling loan program where the maximum amount that FHA will allow is $35,000
• No structural changes can be done with the Streamline 203k Loan program
• No room additions or changes of structural walls are allowed
• Homeowners can remodel your basement, attic, kitchen, and bathrooms with the 203k Streamline Loan program
• New windows, new roof, new flooring, new millwork, new drywall, electrical, plumbing, and HVAC systems can be done with the 203k streamline loan program

Standard FHA 203k Loan program

The standard FHA 203k Loan program is for homebuyers who need a full-blown rehab. Homeowners are allowed to do the following:

• Room additions
• Structural changes.
• Second story additions
• Cost of construction is unlimited up to the maximum FHA loan amount in the county where the property is located
• For example, if the FHA loan maximum loan amount for a particular county is $524,225 (Cook, Lake, Will, Dupage Counties in Illinois), then borrowers can borrow up to that loan amount for both the purchase and construction of the property
• Buyers purchasing a fixer-upper for $100,000 in Cook County, Illinois
• The county maximum FHA lending limit is $524,225
• Construction budget will be a maximum of $265,700 ( $100,000 cost of the home plus $424,225 yields the maximum $524,225 FHA lending limit in Cook County, Illinois)

Eligibility For FHA 203k Loans

Not all mortgage lenders offer FHA 203k home loans, even though they may offer regular FHA loans to their mortgage applicants. Borrowers need a 3.5% down payment for the after repair value of the property. For example, if the cost of the home purchase is $100,000 and the cost of construction is $100,000, borrowers would need 3.5% of the after-repair value of the property, which is 3.5% of the $200,000 which is $7,000.

Mortgage rates on FHA 203k loans are normally higher than regular FHA loans. It also takes longer to close an FHA 203k loan compared to a regular FHA loan. There are more costs incurred with an FHA 203k loan than there are with the regular FHA loan. Costs for home inspections and permits can be quite costly. However, these costs can be rolled into the FHA 203k loan balance.

FAQ’s on FHA 203k Loans

Here are some insights on FHA 203(k) loans (or renovation mortgage loans) as of March 21, 2025. FHA 203l loans allow the borrower to purchase the home and fund the repairs needed in the mortgage, which the FHA, or Federal Housing Association, insures.

What Are FHA 203k Loans?

FHA 203k loans cover buying or refinancing a home, repair, renovation, and even improvement expenses in one single claim. The loan is insured by the FHA, minimizing risks for the lender. This makes it very suitable for home buyers looking to buy a home that could use some renovations and for existing homeowners looking to give their homes a facelift.

How many types of FHA 203k Loans are there?

FHA Limited 203k (previously called Streamline)

• This is for non-structural work, substandard repairs, or superficial restoration work.
• Maximum repair cost: $35,000 (with contingency fees).
• There is no set minimum repair cost,
• However, painting, installing new flooring, or changing appliances may be simple.

FHA Standard 203(k)

• For major renovations, incorporate structural changes like adding rooms and repairing the foundation.
• Minimum repair cost: $5,000.
• A HUD-approved consultant must be hired to supervise the work.

What Are the Eligibility Requirements?

Borrower

• If the borrower intends to pay a 3.5% down payment, they must possess a credit score of at least 580.
• A score between 500 and 579 allows for a 10% down payment, subject to lender overlays.
• The borrower’s debt-to-income (DTI) ratio is assumed to be around 31% for housing and 43% for total debt income.
• However, it can go up to 50%.
• A borrower must move into the property as their primary home within 60 days of closing and has no other options.

Property

• FHA approved Single-family homes, condos, townhouses, and 2-4-unit properties.
• The property must undergo relevant renovations to meet the FHA Minimum Property Standards (MPS).
• The property has to be 1 year old, as new constructions are not accepted.

What repairs or improvements are eligible?

FHA Limited 203(k)

• Improvement covers every upgrade in the kitchen and bathrooms, replacing the HVAC system, minor landscaping, energy efficiency upgrades, flooring, and painting.
• No forms of altering the structure are permitted.

FHA Standard 203(k)

• Covers structural alterations like changes to the foundation and roof, adding walls within the building, upgrading plumbing and electricity, and major remodeling works.
• Items constructed for luxury use, such as pools and hot tubs, are prohibited.
• Ramps designed to improve people’s ease while using a wheelchair can be added.

What Are the Down Payment and Loan Limits?

Down Payment

• The same criteria apply to other FHA loans.
• 3.5% if the credit score is above 580, 10% if it is 500-579.

Loan Limits:

• FHA county limits are observed at $524,225 in low-cost areas.
• Up to $1,209,750 in high-cost areas for purchases, including the price and renovation costs in 2025.

How Does Mortgage Insurance Work?

• Upfront MIP is 1.75% of the loan amount, which can either be paid at closing or financed.
• Annual MIP is 0.15%–0.75% of the loan balance, payable in monthly installments for the life of the loan or eleven years if the borrower puts down more than ten percent.

How Are Renovation Funds Managed?

• Costs are evaluated and budgeted by contractors or HUD consultants.

FHA Standard 203(k)

• Funds are deposited into an escrow account and paid out as significant portions of the work are verified as complete through independent inspections.

Contingency Reserve

• 10%—20% of repair costs are left available for any unforeseen problems that arise during the project.
• (Standard is mandatory; Limited is optional.)

What’s the process to get a 203(k) loan?

• Obtain a 203(k) loan from an FHA-approved lender.
• Select a property and request bids from contractors for the repairs.
• The HUD-approved 203(k) consultant should prepare a work plan for Standard 203(k).
• A loan application containing the purchase price and repair estimates.
• Borrower financials have to be submitted.
• An appraisal is required to determine the home’s “after-repair value” (ARV).
• Closing on loans will require renovations to begin within 30 days and be completed in 6 months (these dates are flexible).

Who May Perform These Renovations?

Licensed Contractors

• These individuals must do most of the work, requiring bids and proof.

DIY

Limited self-work (ex., painting) is okay with a 203k limit.

• However, self-perform typically requires professional help.
• Check lender rules, as they may be more restrictive.

What Are the Advantages and Disadvantages?

Advantages

• Easy credit and low down payment.
• Available for distressed properties that would not qualify for other loans.
• Home equity can be gained through renovations.

Disadvantages

• Especially Standard 203k, more paperwork and monitoring are required.
• Mortgage insurance is needed.
• Strict deadlines can make it hard to meet requirements, like needing contractors.

Can I Refinance with FHA 203k Loans?

Yes. You can refinance an existing mortgage and use a 203k loan to fund renovations. The amount is given based on:

• The lowest of current home value + renovation costs or
• 110% of the ARV post value.

How Do I Obtain a Lender or a Consultant?

• To obtain a consultant or a lender, ask banks or mortgage brokers and look on HUD.gov for FHA-approved lenders.
• For Standard 203(k), use HUD’s directory to find a 203(k) consultant (needed for supervision).

Check with an FHA-approved lender or HUD.gov for the latest information because options may change.