A 203k loan allows you to buy and renovate a home with one loan.
This program is ultra-popular because there’s simply no renovation loan that’s quite as affordable and lenient about qualification.
You can buy a home that no one else wants due to deficiencies that make it ineligible for financing. Or, you can buy an outdated home knowing you can do a complete remodel, and finance it all for 3.5% down.
But what is a Limited 203k Loan versus a Standard 203k and when should you use each?
- Limited 203k loan: Renovations and contingency costs are less than $35,000 and no structural work will be done
- Standard 203k: Renovations over $35,000 and/or requiring structural work
- What you can do with a Limited 203k loan
- Most buyers choose the Limited 203k
- Eligible Limited 203k projects
- Ineligible Limited 203k projects
- Why use a Limited 203k?
- 203k guidelines
- The Limited 203k process
- Finding a Limited 203k Contractor
- The 203k bid
- Maximum Limited 203k loan amount
- What inspections are required?
- Can you do the work yourself on a 203k loan?
- Limited 203k FAQ
- Limited 203k: The right choice for many first-time and repeat buyers
What you can do with a Limited 203k loan
A Limited 203k loan lets you complete simple, non-structural repairs and improvements to an outdated or non-financeable home.
If you find a home with a good layout and the right bedroom and bathroom count, a Limited 203k allows you to complete a remodel plus address any safety issues.
It’s perfect for the buyer who doesn’t mind a little extra work to gain serious equity, plus some experience overseeing a remodel.
These are known as “one-close” loans, meaning you don’t have to take out a construction loan, then refinance it later with a long-term loan. You close one time with a loan amount that covers the acquisition plus construction costs. Repairs are done after closing. This process removes costs of two closings, plus allows more people to qualify for a renovation loan, which is a hard product to qualify for in the private market.
Most buyers choose the Limited 203k
This article will focus on the Limited 203k loan. Most homebuyers choose the Limited version because it requires less preparation, paperwork, and time. Additionally, more lenders offer the Limited version.
Related: 203k Lenders In Every State
We’ll go over what you can do with a Limited 203k and you’ll probably discover that it will fit your needs.
Eligible Limited 203k projects
The Limited 203k can be used for a variety or purposes. The two most popular are to bring the home up to financeable condition and to do cosmetic repairs.
Here is an abbreviated list of eligible repairs:
- Projects with repairs plus contingency costs under $35,000
- Cosmetic repairs like kitchen and bath remodels
- Repairing/replacing plumbing, HVAC, and electrical, septic
- Roof replacement
- Adding energy-efficient systems
- New appliances
- Fixing decks, patios, fences, walkways, and driveways
- Removing or repairing an existing in-ground pool
- Lead paint remediation
- Most other small and less-involved improvements
Ineligible Limited 203k projects
- Improvements costing more than $35,000
- Structural work (moving walls, creating bedrooms etc.)
- Luxury repairs like new swimming pools and outdoor amenities
- Converting a single-family to a multifamily
- Rehabs requiring more than two payments to the contractor
- Repairs that prevent you from occupying the property for more than 15 days.
Beware of the “$35,000” limit
FHA 203k loans come with a “gotcha”: lender 203k fees and a contingency reserve eat up some of your maximum $35,000 limit.
Your actual construction costs should be under about $30,500 to accommodate:
- Contingency reserve: at least 10% of the repair budget
- Inspection fees: $450
- Extra lender 203k fees: $500
Run the numbers with your lender early in the process to make sure costs don’t push you into Full 203k territory.
Why use a Limited 203k?
If you already know why you want a 203k, you can skip this part. But it’s important for those starting to explore the program. Here are the benefits.
Expand homebuying options: Housing inventory is at record-low levels. Instead of only looking for turn-key homes, go after homes no one else wants because they are not financeable or just outdated.
Instant equity: The as-repaired value is often much higher than the home price plus renovation costs.
Lower acquisition costs: You can buy a home at 80-90% of its true value simply because it needs work.
Less competition: Most homebuyers want a turn-key home, so there’s less competition for these homes, no bidding wars, and you can offer below asking price.
Learn renovation management: You can get your feet wet as a home flipper or just learn how the renovation process works early in your homeownership journey.
- 580-640 credit score, depending on lender
- 3.5% down on home price and rehab costs
- Maximum 50-55% debt-to-income ratio
- Upfront mortgage insurance premium of 1.75% of the total loan including repairs
- Ongoing mortgage insurance of 0.55% of the loan amount per year ($46 monthly for every $100,000 borrowed)
- Primary residence only
- Single family residences or 2-4 unit properties
- Must move into the home within 60 days
- Project must be complete within 6 months
- The project can’t displace the borrower for more than 15 days
- Open to U.S. Citizens, DACA recipients, eligible non-U.S. citizens
The Limited 203k process
The 203k loan was invented because it’s nearly impossible (and quite unwise) to renovate a home you don’t own yet.
If you’re a cash buyer, you can buy any home and renovate it with your own money. But most new homebuyers don’t have that capital. They need to finance a home. But you can’t finance some homes due to their condition.
A 203k loan lets you buy the home and repairs with one loan, close the loan, then do the repairs when the house is officially yours. Here’s how that works.
- Find a 203k lender: Here’s how to find a good lender. A lender should be experienced in 203k. Very few are.
- Get a 203k pre-approval: Know your maximum home price plus repair costs
- Look for unwanted homes: Make low-ball offers on homes that no one else wants (most buyers don’t know about the 203k loan!). If you know a contractor, have them look at the home to ensure renovation hard costs will be under $30,000.
- Request a 75-90 day closing timeframe: This is the tough part about 203k loans. They take a long time to close. Some sellers won’t accept a 203k bid because they want to close in 30 days. That’s usually not possible with 203k.
- Request seller closing cost credits: A desperate seller will give you money for closing costs.
- Get an accepted offer: Submit the purchase contract to the lender.
- Find a contractor: Ask your lender to recommend contractors in your area that have done 203k projects.
- Create a work plan: This is an informal document giving the lender a rough idea of your project. Your contractor can help you complete it. Download an FHA 203k work plan template.
- Get a rock-solid bid for repairs: The bid is an important piece of the loan and appraisal process. A bad bid will result in costly appraisal updates and delays. A final, set-in-stone bid is important early in the process.
- Authorize an appraisal: The lender will order an appraisal that will estimate after-repair value.
- Update financial documents: Submit new pay stubs, bank statements, and other personal financial documents to the lender if it’s been more than a few weeks since you were pre-approved.
- Lender submits package to underwriting: When the appraisal is received, the whole file is submitted to the underwriter. This is the person responsible to review and make a decision on the loan and review the appraisal
- Supply “conditions”: The underwriter will request additional items needed, or “conditions.” This could range from personal income and asset documentation to missing items on the bid and more.
- Get a final approval: You’ll receive a “clear to close” from the underwriter when all conditions are met.
- Loan funding: You will sign final loan documents and the lender will fund the loan, meaning the loan is complete and you own the home. The escrow company sets up an escrow account with the repair funds from which to pay the contractor.
- Initial contractor pay-out: The escrow company issues 50% of the repair costs to the contractor.
- Contractor completes the work: The contractor has six months to complete the work. They get the remaining 50% of the repair funds at project completion.
- Move-in: You have 60 days to move into the home. Try to have all repairs completed before you move in. Once you occupy, Limited 203k projects must not displace you for more than 15 days.
- Enjoy your remodeled home: You now own a home that’s probably worth a lot more than your acquisition + repair costs.
Finding a Limited 203k Contractor
FHA does not maintain a list of approved 203k contractors. Any contractor that meets requirements and agrees to 203k terms can do the work. Generally, the company must provide:
- Their contractor’s license
- References from past customers
- Work experience (description of last few jobs)
- An accurate bid
Ask your 203k lender to refer you to some companies. Many contractors will not take on 203k projects because there is more paperwork involved, extra inspections, and bid corrections. (The bid must contain many elements and be fully accurate, as we’ll discuss next).
If you find your own contractor, tell them upfront that you are using a 203k loan. Make sure they understand the extra requirements and can complete the job on time.
The 203k bid
Most contractors will have a hard time putting together a bid that meets all requirements the first time. Before you have them work up the bid, ask your lender for a list of elements that need to be on it. Many lenders will require:
- Contractor’s name, address, phone number, and license number
- Buyer’s name and property address
- A statement that work will begin within 30 days of loan closing and completed within 6 months of closing, and that the borrower will not be displaced more than 15 days
- Acceptance of 50% payout at closing and 50% when the job is complete
- Labor, materials, permits, and tax broken out on separate line items on the bid
- Bottom line bid amount must match the 203k Owner/Contractor agreement
- Buyer and contractor signature and date
Make sure you are 100% decided on the repairs you want to do. Changing your mind mid-process will require a new bid and new appraisal (more on that below).
For a Limited 203k, have just one contractor for the entire job. If you have more than one, each contractor will have to supply a bid that meets the above requirements.
How the bid affects the 203k appraisal
The appraiser will use the final bid to perform the appraisal. The appraiser will note the “cost basis” of the home after repairs, or how much it cost to buy and repair the home. If the bid is inaccurate, the appraisal will be, too.
To avoid expensive and time-consuming appraisal fixes, get an accurate and final bid before authorizing the lender to order an appraisal.
Maximum Limited 203k loan amount
In addition, the maximum loan is the lesser of:
- 96.5% of the total purchase price plus repair costs (3.5% down payment for both)
- 110% of the after-repair value
For example, you buy a $200,000 home and want $30,000 in upgrades. The max loan could be
- $230,000 X 96.5% = $221,950
If the appraiser estimates the home would be worth only $220,000 after repairs, the max loan would be
- $220,000 X 96.5% = $212,300
If your projected after-improved value is less than the purchase and repair costs, re-examine your repairs to make sure you’re getting the best ROI from each. Don’t spend more than the home will be worth. That defeats the purpose of the 203k loan and you might as well buy a turn-key home.
What inspections are required?
For a Limited 203k, repairs under $15,000 do not need an inspection. Instead, the lender can accept a borrower’s Letter of Completion.
For repairs over $15,000, the lender will inspect completed work itself or via a 3rd party inspection service.
Can you do the work yourself on a 203k loan?
Technically, HUD allows borrowers to do their own work. However, most lenders don’t allow it.
First, you have to be a general contractor by trade. You also have to prove to the lender that you have the skills to complete the job, and that you’ll be able to finish it on time while maintaining your primary job (the source of income upon which the loan is based).
You also can’t finance labor costs. Only materials costs may be included in the loan amount.
You can certainly ask to manage the rehab project yourself, but most lenders will require a separate contractor to complete the work. If you are allowed to do your own rehab, you’ll sign a Self-Help Agreement.
Limited 203k FAQ
A Streamline 203k and Limited 203k are the same thing. HUD changed the name from “Streamline” to “Limited” a few years ago. If you see information online about a “Streamline 203k”, it is probably referring to the Limited program.
A Limited 203k allows you to do non-structural repairs costing less than $35,000. A Full 203k allows structural fixes up to and including rebuilding an entire home using the existing foundation. There is no maximum dollar limit for a Full 203k.
Yes. The home can be completely livable and financeable with the standard FHA program. It does not need to be ineligible for you to use 203k. You can use 203k to remodel the bathroom or kitchen and other cosmetic updates.
There is no minimum repair cost for Limited 203k, but you might use FHA Repair Escrow or just pay cash after closing for repairs under $5,000. The 203k comes with extra fees and paperwork that you can avoid if you don’t really need the program.
Your repairs have to be around $30,000 for you to be under the $35,000 maximum for the Limited 203k due to extra fees and reserves. If you are over, you will have to either remove planned repairs or switch to a Full 203k. Using a Full 203k will require much more paperwork and time.
You do not need a 203k Consultant for a Limited 203k. However, you might choose to use one anyway to help guide the project.
Yes, you can refinance your existing home with 203k. You will pay off the existing loan plus pay for rehab costs with the new loan.
Limited 203k: The right choice for many first-time and repeat buyers
The 203k loan can give you access to a wider range of homes. It’s the perfect tool when there are no turn-key homes on the market, or when you just want to get a great deal on a home.