A regular FHA loan already buys plenty of homes that need work. HUD's appraisal looks for a home that's safe, sound and secure, so worn carpet, dated cabinets and old paint don't stop an FHA purchase. A leaking roof, exposed wiring or peeling paint on an older home does, because those have to be fixed before closing. When the repairs are bigger than the seller will handle, the FHA 203(k) loan finances them for you.
How a 203(k) works
A 203(k) is one FHA loan that covers both the purchase and the repairs. The appraiser values the home as it will be after the work, called the after-improved value. You close, the repair money goes into an escrow account, and contractors are paid in draws as the work is completed and inspected. Your payment is a single FHA payment on the combined amount.
The down payment is 3.5% of the price plus the repair costs at a 580 score, or 10% from 500 to 579. The usual FHA mortgage insurance applies: 1.75% upfront, financed, and 0.55% a year with less than 5% down.
Limited 203(k) or Standard 203(k)
| Limited 203(k) | Standard 203(k) | |
|---|---|---|
| Repair budget | Up to HUD's Limited 203(k) cap | At least $5,000, with the total loan inside the county's FHA limit |
| Type of work | Non-structural: roof, kitchen, baths, flooring, air conditioning, windows, paint | Anything the Limited allows, plus structural repairs, additions and major rehab |
| HUD-approved consultant | Optional | Required |
| Time to finish the work | 9 months | 12 months |
HUD sets the Limited 203(k) repair cap in Mortgagee Letter 2024-13 and reviews it each year along with FHA's loan limits, so we confirm the current cap when we price your loan. The consultant inspects the home, writes up the work and cost estimate, and signs off on each draw, and the consultant's fee can be financed on either version.
A worked example in Florida
Chris finds an older single-family home listed at $260,000. The four-point inspection shows a roof near the end of its life, which Florida insurers often won't cover, and the air conditioner and kitchen are original. Contractor bids come to $49,000: $22,000 for the roof, $9,000 for the air conditioning and $18,000 for the kitchen. That's non-structural work well inside HUD's Limited cap, so it's a Limited 203(k).
| Step | Amount |
|---|---|
| Price plus repairs ($260,000 plus $49,000) | $309,000.00 |
| Down payment, 3.5% | $10,815.00 |
| Base loan, 96.5% | $298,185.00 |
| Upfront mortgage insurance, 1.75%, financed | $5,218.24 |
| Total loan | $303,403.24 |
| Principal and interest at a 5.75% rate | $1,770.58 |
| Annual mortgage insurance, 0.55% | $136.67 a month |
The appraiser sets the after-improved value at $335,000. HUD figures the loan on the lower of price plus repairs ($309,000) or 110% of the after-improved value ($368,500), so the full $309,000 counts. Chris walks in with a new roof, which helps with the homeowners insurance quote and the wind mitigation inspection, and $26,000 more value than the total cost.
Other programs that finance repairs
Conventional. Fannie Mae's HomeStyle Renovation loan works the same way on a Conventional loan, from a 620 score. Buyers with scores above about 740 often pay less for its private mortgage insurance than for FHA's premium.
VA and USDA. Both need the home to meet their property standards, so the seller usually makes the required repairs before closing. For a home that needs major work, a first-time buyer usually goes the FHA 203(k) route.
If the cash or the numbers come up short
- Use a gift. A relative can gift the 3.5% down payment on a 203(k), with a signed gift letter.
- Ask for a seller credit. FHA lets the seller pay up to 6% of the price toward closing costs and prepaids.
- Trim the scope. If the after-improved value or your ratios fall short, cutting the kitchen or doing it later can bring the loan into range while the roof and air conditioning still get done.
- Get bids early. Line up licensed contractors before you write the offer so the repair budget is firm when the appraisal is ordered.
The mortgage payment calculator prices the payment on the price plus repairs. Before you make an offer on a home that needs work, call AAA Capital Funding at 888-601-8344 and we'll tell you whether it's a regular FHA purchase, a Limited 203(k) or a Standard 203(k).