How to Finance a Fixer Upper House With an FHA 203(K) Program (2024)

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Co-authored byRyan Bariland Jennifer Mueller, JD

Last Updated: June 3, 2021Approved

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   Meet the borrower eligibility requirements. To get a 203(k) loan, you have to meet the same requirements as all borrowers of any type of FHA loan. Generally, these requirements are designed to ensure that you are less likely to default on your loan.^[2]

   • FHA loans are easier to get than traditional mortgages if you have poor credit, but you still must have a minimum score of at least 580 unless you are able to put down a 10-percent down payment.
   • You must be a lawful resident over the age of 18 with a valid Social Security number and have a steady employment history. For example, you would qualify if you'd worked for the same employer for the past two years continuously, or if you don't have any substantial periods of unemployment between jobs.
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   Set your housing budget. For the 203(k) program, you must be able to pay at least 3.5 percent down. The more you can afford to put down, the lower your monthly mortgage payments will be. An approved lender can help you explore your options.^[3]

   • The federal government also has an online calculator for the 203(k) program available at https://entp.hud.gov/idapp/html/f17203k-look.cfm. You can play around with different values in this calculator to get an idea of how much house you can afford.
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   Narrow your preferences. Based on your budget, you should be able to determine roughly the size of house and lot you want, as well as any other features you're looking for in the property.^[4]

   • This range should also take into account the amount of work that will need to be done on the property so that you can live there.
   • Since the 203(k) program is restricted to primary residences, you want to buy a house in an area you like. Check out regional maps and go exploring to find your favorite neighborhoods that you want to target. Look for areas that best meet your needs in terms of schools, reasonable work commute, and access to public transportation.
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   Work with a real estate agent. While you can search real estate listings online on your own, a real estate agent will have more up-to-date information and be able to actually show you any houses that spark your interest.^[5]

   • Interview several real estate agents, if possible, so you can compare and contrast to find the best person for you. You're going to be closely involved with this person for several months, and you'll have to provide them with a lot of details about your life. Make sure you're comfortable with them.
   • Ideally, you want to use a real estate agent who has experience with people who've financed a fixer-upper house using an FHA 203(k) mortgage. They'll understand the process and what needs to be done to secure the mortgage.
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   Meet with your consultant. When you find a home you like, your real estate agent will bring in an FHA consultant to work with you. Your consultant will meet with you and tour the house you want to buy, then help you complete a preliminary feasibility analysis.^[6]

   • In many cases, your agent or mortgage representative will coordinate the meeting between you and the consultant.
   • The preliminary feasibility analysis describes the repairs to be made and estimates a cost for those repairs as well as an estimate of the market value of the home. This document is necessary for you to be preliminarily qualified for a 203(k) loan.
   • If your real estate agent can't put you in touch with a consultant, go to the HUD website or talk to someone in a HUD-approved housing counseling agency near you.

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   Contact a HUD-approved lender. You can find a list of approved lenders on the HUD website, or by stopping by to visit your nearest HUD field office. Research these lenders carefully, as just because a lender is on the list doesn't mean they frequently approve FHA loans.^[7]

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   Get an estimate on repairs. You can't increase the amount of your loan once it has been approved, so a reliable and accurate estimate is essential before you complete your application. Use a HUD-approved contractor for the fastest results.^[8]

   • If your real estate agent doesn't have a contractor they prefer, check HUD's website for a list of approved contractors in your area.
   • Depending on the scope of the necessary repairs, it may be worthwhile to get more than one estimate.
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   Complete an appraisal. The total amount of loan will be based on either the cost of the home in its existing condition plus the cost of repairs, or 110 percent of the estimated value of the home after repairs or complete.^[9]

   • The FHA will calculate both of these amounts based on the values at which the house is appraised by a certified appraiser. The total amount of your loan will be the lesser of those two amounts.
   • Your total loan amount also may be limited by the FHA's maximum mortgage limits. These vary by state and county.
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   Sign a sales contract. Before you can get the application process started for your 203(k), you'll need a sales contract for the home. The contract must include a clause stating that the sale is contingent on your ability to obtain financing through the 203(k) program.^[10]

   • You can sign the sales contract either before or after the appraisal is complete. However, if you wait until after the appraisal is done you only have 120 days to sign a sales contract. Otherwise, you'll have to get a new appraisal done.

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   Hire a contractor. All the repairs financed by your 203(k) loan must be completed by a licensed contractor. In most cases, it makes sense to hire the contractor who gave you the original estimate on the cost of repairs.^[11]

   • Ideally, you want a contractor who has experience doing home repairs for a home financed through the FHA 203(k) program. You cannot sign your final loan documents until you've hired a contractor, so don't procrastinate.
   • While there are HUD-approved contractors, the department does not recommend or certify individual contractors. Interview contractors thoroughly and check their references. Talking to homeowners who've previously worked with the contractor will give you a good idea of what it's like to work with them.
   • The contractor will be working in and around your house for up to six months. Especially if you plan to live in the house while the repairs are going on, the contractor's personality and disposition may be just as important as their background and work ethic.
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   Wait for final approval. Your consultant, real estate agent, and lender will work with you to complete the paperwork to apply for the FHA 203(k) program, as well as get together all the documentation you need.^[12]

   • The underwriter of the loan may include certain conditions that must be met for you to get your financing. These conditions will be explained to you either by your lender or by your consultant.
   • If there are conditions to be fulfilled (such as payment of a down payment), you must meet these before you will be able to sign your loan documents and close on your new home.
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   Complete the purchase. Once your loan is approved, you'll have meetings with your lender to sign your loan agreement. When the funds are in place, you'll meet with the seller to finalize the sale and take ownership of your home.^[13]

   • If you won't be able to move into the house right away, keep this in mind when you budget your housing costs. You still have to make mortgage payments on the house, even if you can't live in it yet.

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   Get repairs done on time. At least $5,000 of the money in excess of the purchase price of your home must be spent on repairs. These repairs must be completed within six months of the date you closed on the home.^[14]

   • Repairs that must be completed within six months include any repairs necessary to bring the house up to code or make it habitable. The six-month deadline doesn't apply to cosmetic repairs such as paint or installation of a particular kind of flooring.
   • The amount of money earmarked to cover repairs will be placed in an escrow account on your behalf. The contractor gets 50 percent of the cost of repairs up front. Once the work is completed, the contractor's remaining invoice will be paid.
   • Try to avoid paying for improvements that won't add significant value to your home. Treat the repairs as an investment.
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   Schedule your final inspection. Once your contractor has finished all of the necessary repairs, the FHA will send your consultant out to inspect the final result. After the contractor has been paid and the work has been approved, the escrow account will be closed.^[15]

   • Any money left over in the account that was supposed to cover repairs must be used to pay back the principal on the mortgage.

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