I Want to Buy a Fixer Upper. Can I Afford It?: A Primer on FHA 203(k) Loans

You have two dreams in life: One, you want the perfect home in the perfect neighborhood in your perfect mountain town. Two, you want to be like Chip and Joanna—so much so that you often refer to them as your spirit guides.

You worked with your Beverly-Hanks agent to pick your perfect mountain town, home in your perfect neighborhood, and now you’ve found the perfect house. Well, it’s almost perfect. Except for the rotting back deck and 70s-era shag carpet kitchen and century-old wiring system. But you have a vision, and with a little elbow grease and fresh paint, you know you can make it beautiful again.

Time to tackle dream number two!

We get why you’re committed to buying that not-quite-perfect fixer upper and seeing your vision through to fruition. In that case, it may be beneficial to consider a 203(k) mortgage loan. The government-backed loan could be just what you need to make your dreams come true so you can Live the Life You Choose.

I Want to Buy a Fixer Upper. Can I Afford It?: A Primer on FHA 203(k) Loans

What is an FHA 203(k) Loan?

Remodels can be expensive. They can be especially prohibitive if you’ve just taken on a new mortgage. And some homes require significant updates to be considered “habitable” by lenders. That’s where the Federal Housing Administration’s 203(k) Rehabilitation Mortgage Insurance Program may be helpful.

Backed by the FHA, 203(k) loans give you the money to finance a house, plus the money to do a number of necessary renovations, wrapped into one loan. While they do not actually lend the money to you directly, the FHA “insures” a loan that is provided by an FHA-approved lender. In many cases, the loan will also include a 20% “contingency reserve” to cover unexpected additional costs or funds. It may also cover up to six months of mortgage payments. These funds free you up in case you need to live elsewhere during the course of the remodel.

The terms of your individual 203(k) loan and your location will determine the amount you receive. In most cases, you can borrow up to 110% of the home’s projected value after repairs are made. However, if you’re working on a single-family residence and your repairs are pretty straightforward, HUD mentions a Limited 203(k) program, which caps the loan for your upgrades at $35,000.

What Properties and Repairs Qualify for FHA 203(k) Loans?

Homes that qualify for the 203(k) program must first qualify under the standard FHA requirements. After those standards are met, homes must:

  • be a one- to four-family home that has been completed for a least one year.
  • have been torn down, but with some of the existing foundation is still in place.
  • be one that you want to move to a new location.
  • be an eligible condo, but not a co-op.

The repairs that qualify depend on which 203(k) loan you have secured. Standard 203(k) loans are given for significant remodeling, including structural repairs, a new garage, or landscaping. This may include:

  • bathroom and kitchen remodels.
  • decks and patios.
  • heating and air conditioning systems.
  • flooring.
  • new siding.
  • plumbing.
  • making home additions, such as a second story.

The Limited 203(k) loan also covers “energy conservation improvements, new roofing, new appliances, or non-structural repairs such as painting.” Neither loan covers “luxury improvement,” such as adding a swimming pool, or improvements that do not become permanent to the property.

What are the Pros and Cons of Getting an FHA 203(k) Loan?

The main benefit of 203(k) loans is that they give you the ability to buy a home in need of repairs that you might not otherwise be able to make without relying on an equity loan. Since 203k loans are guaranteed by the FHA, lenders take on less risk when offering this loan. As a result, it’s easier to get certain homes approved that lenders may be otherwise uninterested in financing.

However, you must qualify for an FHA 203(k) mortgage based on the costs of your renovation in addition to the purchase price. For example, if you want to refinance or purchase a home valued at $150,000 and finance $25,000 in repairs, you need to qualify for a $175,000 mortgage and have home equity or a down payment of 3.5%.

203(k) loans also offer you means to secure temporary housing during the course of the repairs or remodeling. This can mean a world of difference from living in a construction zone for six months. However, you are limited to the six-month time frame to make your repairs. This can be a tight turnaround depending on the scope of your repairs, so it’s important to work with a reputable contractor who is familiar with the 203(k) process.

Keep in mind that as a government-backed loan, there is also a fair amount of red tape to deal with, including extensive application paperwork, FHA require standards to your repairs, and back and forth with the FHA and your lender. That time and those requirements should be built into your plans for the project.

In addition, not all properties qualify for these loans, and there are limits on the funding you can receive. In the end, it may not be the best financial fit for the upgrades you have in mind. For instance, homeowners working on environmentally sustainable projects, like upgrading heating and cooling systems, may receive a greater benefit from PACE loans. It’s best to examine all your options before deciding on a 203(k) loan.

Are 203(k) Loans Right for You?

If you’re still not sure whether you would benefit from an FHA 203(k) loan, your Beverly-Hanks agent can help! Ask your agent for more information on these and other government-insured mortgage options. He or she will be able to help you weigh the short- and long-term benefits of your ultimate decision. 

Find out how together we can make your dream home (and home renovation!) a reality. It’s our goal to help you Live the Life You Choose.


All real estate is local. In order to make confident real estate decisions, we believe it is important for you to have timely and neighborhood-specific information. If you would like more information about purchasing a home, our experts at Beverly-Hanks are here to help. Contact us today to speak with a Beverly-Hanks real estate agent about buying homes and land in Western North Carolina.


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