Buy that Fixer-Upper Under the FHA’s 203(k) Program!

Smiling man sits in newly renovated kitchen

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Do you know about the FHA’s 203(k) program? You can get a low (3.5 percent) down payment loan for the purchase price plus the cost of renovations on a single-family home or a multi-family property with up to four units. Your loan limit is based on the appraised value after the improvements have been made.

The 203(k) program was devised back in 1978, but really gained popularity during the housing bust. With the rise in foreclosures, a glut of distressed properties flooded the market. The 203(k) program offers financing for and an incentive to negotiate the purchase of a property in poor condition.


The property in question must have been completed at least one year prior. The number of units must meet local zoning laws. Co-ops are not eligible. Demolished or razed homes are eligible, provided some of the original foundation remains. Condos are eligible, but rehabilitation is limited to the interior. The four-unit structure limit applies only to the building the condo is in, not to the entire development.

Mixed-use properties are eligible for 203(k) loans, provided the commercial space does not exceed the allowable percentage of space. See the HUD website for details.

The buyer is required to pay a private consultant to draft a list of improvements to be made, ensuring that all improvements bring the home up to current health and safety standards. Improvements must begin within 30 days of closing and must be completed within six months. Rehab funds are disbursed directly to contractors upon completion and inspection.


Although the program requires owner occupancy, an enterprising investor could use the 203(k) to purchase a multi-unit property, live in it for a year during renovations, and then refinance to a conventional loan and move out.

203(k) loans can be used to convert a single family home to a multi-family (up to four) property, or to decrease the number of units in a multi-family dwelling to between one and four.


FHA loans are more expensive than traditional mortgages. The interest rates are slightly higher, averaging just under 4 percent in 2012. And the low down payment means you’ll have to pay private mortgage insurance (PMI) until your equity equals 20 percent or more of the home’s value. In most cases, the insurance premium (between 1.5 and 3 percent of the total loan value) and closing costs are added to the loan, so you end up paying interest on these costs for the life of the loan.

Who can participate?

Anyone can apply for an FHA loan. FHA loans are perfect for buyers with less cash on hand, or with slightly lower credit scores. If you can’t afford a down payment of 20 percent plus closing costs, you should consider applying for a traditional FHA loan. And if you want to buy a property that needs improvement, you should apply for a 203(k) loan. 203(k) loans are subject to current FHA loan limits – between $271,050 and $1,094,625, depending on geographic area. Click here to find out the loan limits for your area. Your terms, including your interest rate, will depend on your own credit history and credit score.

203(k) funds cannot be used for luxury improvements like swimming pools, but neither are they limited to distressed properties. You can use 203(k) funds to add a room, a deck or solar panels, or to make certain other improvements to a home that is in otherwise good condition. All improvements must meet certain minimum standards.

Recent purchasers who paid cash can participate in the 203(k) program by refinancing within six months.

Image (CC 2.0) Flickr

Kimberly Rotter
Kimberly Rotter is a writer and editor in San Diego, CA. She and her husband have an emergency fund, two homes, a few vehicles, a handful of modest investments and minimal debt. Both are successfully self-employed, each in their own field. Learn more at RotterWrites.com.

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