Buying a home that's a fixer-upper can be a less expensive way to acquire your first house. Updating a property can help you build equity. To help homeowners achieve these goals, the Federal Housing Administration offers two financing options that combine mortgage and renovation loans:
- A standard 203(k) mortgage is for major renovations to single-family properties, such as structural changes. To qualify, the borrower's project must have a minimum repair cost of $5,000. An FHA-approved consultant must oversee the project.
- A limited 203(k) mortgage is for minor rehab projects, such as installing new appliances or carpeting. It covers nonstructural work up to $35,000. There is no minimum amount for repair costs.
These loans are available only to buyers who will use the home as their primary residence.
Here's what borrowers need to get one
To qualify, applicants must have a minimum credit score of 580 and make a 3.5% down payment, according to SoFi. Applicants with poor credit can also qualify if their credit score is at least 500 and they make a 10% down payment, SoFi said.
Applicants apply for the loan through an FHA-approved lender, which will assign a consultant to the loan. The consultant will help plan the rehab work and the cost, SoFi said.
Examples of eligible improvements, according to the U.S. Department of Housing and Urban Development:
- Repair or replace plumbing, heating, air conditioning and electrical systems
- Complete kitchen and bathroom remodeling
- Repair or install new roofing, siding and gutters
- Create accessibility for persons with disabilities
- Build an eligible accessory dwelling unit
- Convert a one-family unit into a two- to four-family unit
- Create additions or finish attics and basements
- Renovate or construct a garage
- Replace windows or flooring
- Make energy-efficient upgrades
- Repair structural damage
There are several advantages to 203(k) loans, according to HUD. Home improvement loans often have high interest rates and short repayment terms, the federal agency said. The 203(k) program consolidates loans into a single, long-term fixed or adjustable-rate loan that covers the acquisition and rehabilitation of the property, HUD said. Those 203(k) loans enable borrowers to consider rundown or vacant properties that might otherwise sit on the market, giving first-time buyers more choices.
But homebuyers need to educate themselves on the program before applying, said Christine Sommer, cofounder of Liberties Homes, a home flipping business in Philadelphia, because there are strict guidelines on loan amounts, down payments, financial readiness and residency.
Pro tip: New buyers should always stick to cosmetic updates, she said. "If you’re not experienced with renovations, avoid older homes with major structural or mechanical issues," she explained. "It’s very easy to go over budget or run into delays if the scope is too big.”
“I actually used a 203(k) loan myself to buy my current home," she added. "We did a full cosmetic rehab — things like flooring, paint, kitchen upgrades — and it allowed us to get a better deal on the house while rolling the cost of improvements into the loan.”