FHA 203(k) Loans: Buy Your House and Renovate It

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By Lydia Kibet Updated September 1, 2025
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Edited by Cara Haynes

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With an FHA 203(k) loan, you can turn a fixer-upper into your dream home by financing renovations that would normally cost you thousands of dollars. If you’re like most Americans, you probably don’t have enough cash saved to cover both the purchase of a home and renovations. That’s where FHA 203(k) loans can help. 

We’ll walk you through how 203(k) loans work, who qualifies, and how they compare with other renovation financing options. We’ll also cover the pros, cons, and common mistakes so you can decide if this loan is the right fit for your needs.

✅ Renovating your current home or buying a fixer-upper? An FHA 203(k) loan can cover both the purchase and the renovation in one mortgage. To make the process easier, we recommend working with Clever Real Estate. They can connect you with top local agents and trusted lenders who understand 203(k) loans, at no cost to you. Get matched with a Clever agent today.

What is a 203(k) loan?

Backed by the Federal Housing Administration (FHA), a 203(k) loan lets you roll the purchase or refinance of a home and the cost of renovations into a single mortgage. Instead of juggling two separate loans, you can finance everything together, often with a lower down payment and more flexible credit requirements than conventional loans. This makes it especially useful for first-time home buyers who want to purchase a fixer-upper or homeowners looking to refinance and upgrade their current property.

It’s important to note that while all 203(k) loans are FHA construction loans, not all FHA construction loans are 203(k) loans. Some FHA programs finance brand-new builds from the ground up, while the 203(k) is strictly for repairing or improving an existing property.

Types of 203(k) loans

There are two types of 203(k) loans: the standard 203(k) loan and the limited 203(k) loan. Both options are federally insured, but each serves different projects.

  • Standard 203(k) loan: If your home or fixer-upper requires major structural work, a standard 203(k) loan is the best financing option. Renovations must cost a minimum of $5,000, and you must hire an FHA-approved consultant to oversee the project. 
  • Limited 203(k) loan: This loan type is perfect for a home that’s move-in ready and requires minor improvements or repairs that don’t cost more than $75,000. You cannot use a limited 203(k) loan to make structural changes, such as adding new rooms. 

203(k) loan requirements

Who qualifies for a 203(k) loan? You must meet the following 203(k) loan requirements to be eligible:

Credit score and down payment

You’ll need a credit score of at least 580 with a 3.5% down payment. If your score falls between 500 and 579, you’ll need to put 10% down.

Debt-to-income ratio

Most lenders require applicants to have a debt-to-income (DTI) ratio—the percentage of your gross monthly income that goes to debt payments—not exceeding 43%. However, some lenders may accept higher ratios if you have strong compensating factors.

Occupancy

You must live in the home as your primary residence. The program isn’t available for vacation homes or investment properties.

Loan limits

The total loan must fall within the FHA loan limits, which vary by county. In 2035, the FHA lets you borrow a maximum of $524,225 in low-cost areas or $1,209,750 in high-cost areas for single-family properties. You can search the loan limit in your county on the HUD website.[1]

Mortgage insurance premiums

You’ll need to pay an upfront mortgage insurance premium (UMIP), usually 1.75% of the loan amount. There’s also an annual MIP that ranges from 0.15% to 0.75% of the loan amount.

Pros and cons of 203(k) loans

A 203(k) loan can be a powerful tool if you’re looking to buy a fixer-upper or remodel your current home, but it’s not the right fit for everyone. Like any mortgage program, it comes with benefits and downsides.

Pros

  • One loan for purchase and renovation
  • Low minimum down payment
  • Lower credit score requirement
  • Opportunity to build equity quickly
  • Lower interest rates compared to other home improvement loans

Cons

  • You can only use it to finance a primary residence 
  • Mortgage insurance can make the loan expensive
  • Repair restrictions
  • Require a licensed HUD consultant

How to get an FHA 203(k) loan

Applying for a 203(k) loan involves a bit more paperwork than a standard mortgage because you’re financing both the purchase (or refinance) and the renovation. Here’s a clear look at how the process works from start to finish:

Find an FHA-approved lender

Not all lenders offer 203(k) loans, so the first step is choosing one that’s FHA-approved and has experience with this type of financing.[2] A knowledgeable lender can walk you through the rules and help you avoid delays.

Get preapproved

Like a regular mortgage, you’ll go through preapproval to confirm how much you can borrow based on your income, credit, and debts. 

Choose the property and loan type

Once preapproved, choose the property you want to purchase or refinance and decide whether to take out a standard 203(k) loan or a limited 203(k) loan. 

Hire a contractor or a consultant

The next step is to find licensed contractors to provide bids. For the standard 203(k), you must also bring in a HUD-approved consultant to ensure the renovation plan meets FHA guidelines.

Create a renovation plan and submit application

With contractor bids, you’ll pull together a detailed scope of work, timeline, and cost estimates. Your lender submits this along with your loan application.

Appraisal

An FHA appraiser evaluates the property’s current value as-is and its projected value after renovations. For a standard 203(k) loan, the lender will arrange for a HUD-approved consultant to visit the property. The consultant will do a feasibility study to ensure the improvements meet the minimum standards and increase the property’s value. A consultant isn’t needed for a limited 203(k) loan, but the property will still undergo an appraisal.

Close on the loan

Once approved, you’ll close the loan just like a traditional mortgage. However, the lender will place the renovation funds in an escrow account.

Renovation phase

Contractors receive payments in installments as progress is inspected and approved. For a standard 203(k) loan, the HUD consultant signs off on each draw request.

Completion and final inspection

Once the renovation project is complete, a final inspection is done to ensure the repairs meet FHA standards. Your 203(k) loan converts into a regular FHA mortgage with one monthly payment.

FHA 203(k) loan vs. construction loan

An FHA 203(k) loan and a construction loan both help finance home improvement projects, but each serves a different purpose. The 203(k) loan is for buying or refinancing a fixer-upper and rolling renovation costs into one mortgage. A construction loan, on the other hand, is the best option when you’re building a new home.

The biggest difference is accessibility. Since the FHA backs 203(k) loans, credit score and down payment requirements are more lenient, making it an attractive option for buyers who don’t qualify for stricter loans. Construction loans usually require strong credit, a larger down payment, and more financial scrutiny.

Another difference is cost and structure. A 203(k) loan converts into a long-term FHA mortgage with fixed payments, while construction loans are often short-term and refinanced once the project is complete.

Common pitfalls to avoid

While a 203(k) loan comes with several advantages, here are some common pitfalls to avoid:

  • Underestimating renovation costs: It’s easy to assume your contractor’s first estimate will be the final price. However, surprises almost always pop up during renovations. The FHA recommends including a contingency buffer of 10%–20% in your budget to cover unexpected costs.
  • Hiring contractors unfamiliar with 203(k) requirements: Not all contractors are familiar with the FHA guidelines. Working with experienced contractors ensures you don’t face delays, rejected bids, or issues with getting funds released.
  • Skipping the HUD consultant: For standard 203(k) loans, a HUD-approved consultant is required to oversee the process. Skipping or trying to cut corners here will lead to delays.
  • Assuming all projects qualify: Improvements, such as pools and outdoor kitchens, aren’t eligible. 
  • Forgetting about mortgage insurance: Like all FHA loans, a 203(k) requires both upfront and ongoing mortgage insurance premiums. If you don’t factor this into your monthly budget, the loan may feel less affordable than you expected.

Is an FHA 203(k) loan right for you?

If your current home needs remodeling or you found a fixer-upper you want to turn into your dream home, a 203(k) loan can be a great financing option. Combining the purchase and renovation costs into a single mortgage simplifies the entire process.

However, a 203(k) loan isn’t for everyone. If you prefer a move-in-ready property or want to do improvements that aren’t eligible, this loan may not be the best fit. Plus, the process takes more time and paperwork than a standard mortgage.

Article Sources

[1] HUD.gov – "FHA Mortgage Limits". Accessed Aug. 28, 2025.
[2] HUD.gov – "HUD Lender List Search". Accessed Aug. 28, 2025.

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