Rehabbing Your New Home with a 203k Loan

by Michele Lerner


Prospective home buyers who are interested in jumping into the real estate market by purchasing a foreclosure may be put off by the abysmal condition of some of these homes. While foreclosures are not always in bad condition, they are sold “as is”, meaning that the buyers will need to handle not only cosmetic changes (fresh paint and new carpet), but also major repairs.

If you are intent on buying a foreclosure, but are not a do-it-yourself expert then chances are you will need to hire a contractor to handle most of the work that needs to be done. Trying to figure out how to finance both a home purchase and a home rehabilitation project at the same time can leave you strapped for cash.

However, the Federal Housing Administration (FHA) has a program to help you do both: the 203(k) mortgage insurance program. These loans, which are not limited to foreclosures, can be used by homebuyers to purchase and improve any property within certain limits.

Here are a list of important restrictions to keep in mind before you take advantage of this loan:

  1. In the D.C. metro area, FHA 203(k) loans are limited to a maximum of $729,750, so the total value of the property cannot exceed that amount. The property’s value is determined either with an appraisal before the rehabilitation that factors in the cost of the rehab work, or 110 percent of the appraised value after the rehabilitation, whichever is less.
  2. The loan program is not available to investors, so the borrower must be the owner/occupant.
  3. The program is limited to one-to-four unit dwellings, and co-ops are not eligible. Some condos are eligible if they are in an FHA-approved development and the work is restricted to the individual unit.
  4. Borrowers are eligible to apply for the loan as long as they can pay the monthly mortgage payments. No specific credit scores or income levels are required.
  5. The minimum cost of the rehabilitation to be financed is $5,000.
  6. The rehabilitation work must start within 30 days of the loan agreement closing and must be completed within a time frame (not to exceed six months) agreed on in the settlement papers.
  7. Borrowers can do the work themselves or hire a contractor, but HUD recommends hiring an independent consultant to estimate costs to speed up the time between the loan application and the closing.

Buyers using the 203(k) loan program are also restricted against using the money for luxury improvements, so no government-funded hot tubs! Approved projects include modernizing the functions of the home, structural alterations, elimination of health hazards, reconditioning or replacing plumbing systems, roofing or floors; major landscaping or site improvement and making a home accessible for a disabled person.

For more specific information on these loans, go to the FHA website or consult an FHA-approved lender.

This article originally published at http://dc.urbanturf.com/articles/blog/rehabbing_your_new_home_with_a_203k_loan/1434


  1. Joe said at 4:19 pm on Wednesday April 3, 2013:

    It states that you can do the work yourself.  Is that just for the streamlined or both 203s?  I’ve read that you can’t do the work, so I’d just like clarification—-maybe its a DC thing that we can do the work ourselves.



  1. Shilpi said at 4:40 pm on Wednesday April 3, 2013:

    Hi Joe,

    Here’s some more info from HUD: http://urb.tf/XYmNce

    According to the link, it looks like the owner can do the work themselves, but they must take out enough money to cover the cost of hiring a contractor regardless:

    “Cost estimates must include labor and materials sufficient to complete the work by a contractor. Homebuyers doing their own work cannot eliminate the cost estimate for labor, because if they cannot complete the work there must be sufficient money in the escrow account to get a subcontractor to do the work.”

    Hope that helps!

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