How to Finance a Fixer-Upper with an FHA 203(k) Home Loan

How to Finance a Fixer-Upper with an FHA 203(k) Home Loan

Buying a fixer-upper can be a fast way to get into a great home that is selling below market value and build home equity fast.  But buying a home that needs a lot of repairs and remodeling can also be a money pit with whole lot of stress. If you want to dive into a home improvement project and buy a fixer-upper, then the FHA 203(k) home loan can help you save money and build home equity fast.

FHA 203(k) Home Loan Explained

The FHA 203(k) home loan is a government-backed loan (Federal Housing Administration) created specifically for new homeowners who are willing to take on a fixer-upper or remodel a home that needs serious work.  It has a few names but they all work the same: FHA 203(k) Home Loan, Mortgage Rehab Loan, Section 203(k) Home Loan.  In short, the FHA 203(k) mortgage finances the purchase price of the home along with the cost of repairs into a single home loan.

Why the FHA 203(k) Home Loan is a Smart Move

How it works: An FHA 203(k) home loan combines the purchase price of the house along with the estimated cost of repairs and remodeling, including labor and materials, into one home loan.

This means you can buy a fixer-upper and you’ll have one mortgage, instead of multiple loans or lines of credit.  With all the costs rolled into one home loan, homeowners are less likely to buy a money pit or a property with endless repairs.

Why? Because the cost of the entire remodel needs to be estimated and approved before the loan is approved.  To qualify for the FHA 203(k) home loan, all estimated repairs including labor and materials have to be approved up front.

Once your loan is approved, you know you’ve got the financing you need to finish the work on your new home. It’s a good safety net, especially if this is your first fixer-upper.

Mortgage Options & Requirements for Section 203(k)

The Section 203(k) home loan is typically a 15-year fixed or 30-year fixed-rate loan, but you can also apply for an adjustable rate mortgage (ARM).  The rates might run a little higher than conventional home loans, but once the repair work is finished you could consider refinancing.

The FHA 203(k) mortgage also has refinance options available for current homeowners who are cash-strapped or don’t want to tap into their equity for a remodel project.

A few requirements:

  • Down payment is typically 3.5% of the purchase price plus cost of repairs
  • Maximum loan amount is 110% of formal appraisal
  • Mortgage insurance is required
  • Minimum credit score of 580 (most lenders may require 620+)

Deciding if a Rehab Loan is a Good Fit

The Section 203(k) mortgage is a great fit for older homes that need a lot of repair, especially if the home is selling well under market value for a specific area.  This allows you to build equity fast and it’s considered a lower risk.

The rehab loan is designed for fixer-uppers that need more substantial work and are considered major projects.  If you are looking at a property with less than $5k in repairs, it probably won’t meet the requirements of the FHA 203(k) home loan.


If you’re thinking about buying a fixer-upper or starting a major remodel, the FHA 203(k) home loan might be a smart option. Working with an experienced mortgage broker makes all the difference when it comes to figuring out your best loan. If you’re thinking about buying a property that needs some serious TLC, give us a call. We can help.