FHA 203(k) rehabilitation loan

The FHA 203(k) rehabilitation loan is a government-backed mortgage that allows borrowers to finance both the purchase of a home and the cost of renovations in a single loan. Insured by the Federal Housing Administration (a division of HUD), this program eliminates the need to take out a separate purchase mortgage and a second home improvement loan or construction loan — streamlining the process and often reducing total borrowing costs.

73 steps across 12 sections

1. Find a 203(k)-Experienced Lender (Before House Hunting)

  • Not all FHA lenders offer 203(k) loans — seek out lenders who specialize in them
  • Ask specifically: "How many 203(k) loans have you closed in the past year?"
  • Get pre-approved for a 203(k) loan, specifying your estimated renovation budget
  • Understand the additional fees: supplemental origination fee (~1.5% of renovation costs), inspection fees, HUD consultant fees (Standard only)
  • Ask about the lender's specific credit score overlays and DTI limits

2. Find the Property and Make an Offer

  • House hunt with your pre-approval amount (purchase + renovation) in mind
  • Consider properties that others avoid due to condition — this is the 203(k) advantage
  • Make an offer contingent on 203(k) financing
  • Inform the seller's agent that the timeline will be longer than a standard sale
  • Get the property under contract

3. Hire a HUD-Approved 203(k) Consultant (Standard Only)

  • Find consultants on the HUD 203(k) Consultant Roster
  • The consultant inspects the property and identifies all required repairs
  • The consultant prepares the "Work Write-Up" — a detailed specification of all work to be done
  • The consultant prepares cost estimates for each item
  • The consultant prepares architectural exhibits if structural work is planned
  • The consultant will conduct draw inspections during construction

4. Get Contractor Bids

  • Obtain bids from licensed, insured contractors
  • Only one general contractor may be used per project
  • Contractor must provide a detailed line-item bid matching the Work Write-Up (Standard) or your renovation plan (Limited)
  • Bid must include: scope of work, materials, labor costs, and timeline
  • Contractor cannot be the borrower, a family member, or anyone with an identity of interest
  • Verify contractor's license and insurance (general liability + workers' compensation)
  • FHA does not maintain a list of "approved" contractors — any licensed contractor who agrees to the terms can do the work

5. Appraisal

  • Lender orders an FHA appraisal
  • Appraiser determines the "as-is" value and the "after-improved" value based on the proposed renovation plans
  • The after-improved value determines maximum loan amount
  • If the appraisal comes in low, you may need to reduce the scope of work, contribute more cash, or renegotiate the purchase price

6. Loan Approval and Closing

  • Lender underwrites the loan based on your financials, the property, and the renovation plan
  • Standard 203(k) requires a contingency reserve: 10% for occupied properties, 15% for properties built before 1995 (potential lead paint), 20% if utilities are not on at time of inspection
  • Review and sign the Homeowner/Contractor Agreement
  • Review and sign the Rehabilitation Loan Agreement
  • Close on the loan — renovation funds go into an escrow account

7. Renovation Phase

  • Contractor must begin work within 30 days of closing
  • Contractor may not stop work for more than 30 consecutive days
  • All work must be completed within the allowed timeframe (9 months for Limited, 12 months for Standard)
  • Draw payments are released from escrow as work progresses (see Escrow/Draw Schedule below)
  • HUD consultant (Standard) or lender inspects work before each draw is released
  • Change orders require lender approval — do not authorize changes without written approval

8. Final Inspection and Completion

  • Final inspection by HUD consultant (Standard) or lender (Limited)
  • All work must meet local building codes and pass any required municipal inspections
  • Contractor provides lien waivers for all work completed
  • Any remaining contingency reserve funds are applied to the mortgage principal
  • If work is satisfactory, final draw is released to contractor

9. Standard 203(k) -- Eligible Work

  • Foundation repairs
  • Moving or removing load-bearing walls
  • Second-story additions
  • Basement finishing
  • Garage construction or conversion
  • Complete plumbing replacement or repair
  • Electrical system upgrade or replacement
  • HVAC installation or replacement
  • Sewer/septic system repair or replacement
  • Well drilling or repair

10. Limited 203(k) -- Eligible Work

  • Kitchen and bathroom remodeling
  • Painting (interior and exterior)
  • Appliance replacement
  • Roof repair (not full structural roof replacement)
  • Window and door replacement
  • HVAC replacement
  • Minor plumbing and electrical repairs
  • Accessibility modifications

11. Ineligible Improvements (Both Types)

  • Swimming pool construction (existing pools can be repaired)
  • Outdoor kitchens or barbecue pits
  • Tennis courts, basketball courts
  • Hot tubs or saunas
  • Any luxury or recreational improvement
  • Any non-permanent structure (gazebos, detached sheds not on foundation)
  • Improvements that solely benefit commercial use
  • Furniture, appliances not permanently installed
  • Tear-down and rebuild (if foundation is not being retained)

12. Limited 203(k) Draw Schedule

  • Option A: Single lump-sum payment after all work is complete and inspected
  • Option B: Two draws — 50% after roughly half the work is inspected and approved, 50% upon completion
  • Some lenders allow an initial materials draw (up to 50% of materials costs)

Common Mistakes

  • Choosing a lender without 203(k) experience
  • Underestimating renovation costs
  • Choosing the wrong 203(k) type
  • Not understanding the timeline
  • Trying to do the work yourself

Pro Tips

  • Use the 203(k) for negotiating leverage
  • Get your contractor involved early
  • Interview 3+ contractors
  • Build in buffer time
  • Finance your mortgage payments during renovation (Standard only)

Sources

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