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What to Know about FHA 203K loans

May 02, 2018 · 5 minute read

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What to Know about FHA 203K loans

Buying a fixer upper home is sometimes romanticized by pop culture. I don’t know about you, but I could watch a couple hours of HGTV and feel ready to strap on a tool belt and put a sledgehammer through some poorly placed walls. While it’s fun to dream, the reality of home renovation is that it can be laborious, especially if the home needs serious help.

Repair work requires energy and resources, and it can be difficult to secure a loan to cover both the value of the home and the cost of repairs—especially if the home is currently uninhabitable. A lender generally won’t take that sort of chance.

But sometimes, buying a fixer upper is the option for you. It’s already hard to afford a home, and if you find a house that’s under budget and in the right neighborhood, it’s worth considering doing the repairs yourself. That’s where an FHA 203k loan can help.

The Federal Housing Authority (FHA) runs a program that makes loans available for homes that require substantial repairs. It is also possible to take out an FHA 203k loan for home repairs only, though it might not be your best option if that’s all you need. Read on for information on FHA 203k loans and your other home improvement loan options.

What is an FHA 203k home loan?

An FHA 203k loan is given to borrowers who want to buy an older home that requires repairs or modernization to be livable. Prior to the availability of FHA 203k loans, borrowers often had to secure multiple loans to obtain a mortgage and a home improvement loan.

The FHA gives 203k loans to provide one single source of backed financing and a process that is streamlined and regulated. The government is interested in the fixing up of older houses, primarily because higher home values can rejuvenate neighborhoods.

Because the loan is backed by the federal government, you may be able to secure a 203k loan even if you don’t have stellar credit. Rates are generally competitive but may not be the best, because a home with major structural flaws is a risk to the lender. The FHA 203k process also requires more coordination, paperwork, and work on behalf of the lender, which can drive the interest rate up slightly.

What can FHA 203k home loans be used for?

Repairs and Purchase:

For example, if the home needs a new bathroom or new siding, the loan will include the projected cost of those renovations in addition to the value of the existing home. An FHA 203k loan will cover most structural repairs, remodels, and home additions, but will not cover “luxury” upgrades like a pool or gazebo (so close!). If you are thinking about a home addition, use this Home Improvement Cost Calculator to get an idea of what it will cost.

Because your loan amount is determined by project estimates done by the lender or the FHA, it’s imperative that you work with contractors who won’t underbid. The FHA 203k process is paperwork-heavy; You’ll want to work with contractors who are familiar with the process.

Mortgage LoanMortgage Loan

Temporary Housing:

If the home is indeed unlivable, the 203k loan can include a provision to provide borrowers with up to six months of temporary housing costs or existing mortgage payments.

Who is eligible for an FHA 203k loan?

Individual home owners and nonprofit organizations can use an FHA 203k loan, but investors cannot. If you’re buying a condo or a townhouse, 203k loans are generally only issued for interior remodeling projects, not for shared, outdoor areas. However, you can use a 203k loan to convert a single-unit home into a two to four-unit housing complex.

Your credit doesn’t have to be perfect to qualify for a 203k loan, though you’ll have the best chance at approval (and a better rate) if your score is over 640 and you have a low debt-to-income ratio. To apply for an FHA loan, you have to use an FHA-approved lender . (Don’t forget to always get multiple quotes.)

Other Considerations for an FHA 203k Loan

Rates and Fees:

While the base rate for an FHA 203k is low, lenders generally charge additional fees, such as a mortgage insurance premium (MIP), a supplemental origination fee, fees to cover the preparation of documents, and a higher appraisal fee.


FHA 203k loans require a significant amount of coordination and paperwork for all parties involved—the lender, the borrower, and the contractors. If you can’t commit to the lengthy process, you might want to consider other options.


With an FHA 203k loan, projects are expected to be completed within six months. You will be required to use only licensed contractors and meet basic energy efficiency and structural standards, such as removing lead paint or outdated electrical wiring.

What are my other home improvement loan options?

The FHA 203k provides the most comprehensive solution for buyers who need a loan for both a home and it’s repairs. However, if you can afford the home out of pocket, or inherited a fixer upper property, you may only need help covering the improvements or renovations.

If you only need a loan for home improvements, there are other options to consider. Depending on the improvements you have planned, your timeline, and your personal financial situation, one of the following could be the better fit.

Cash-out Refinance:

If you have an existing mortgage and want to take out a loan for home improvements, a cash-out refinance from a private lender is worth looking into. The bank will refinance your existing mortgage, usually to extend the loan’s duration and provide additional cash for home improvements. This could also be an opportunity to improve your mortgage interest rate.

This could be a better option if you are on a tight timeline, own a significant amount of your home, have improved credit, or want autonomy over your renovations.

PACE Loan:

For green improvements to your home, such as solar panels or energy-efficient heating systems, you might be eligible for a PACE loan . PACE is available to investors and for environmentally sustainable improvements on commercial properties as well.

Personal Loan:

For those with good credit, it is possible to get a personal loan for a competitive rate. Using a personal loan for home improvement has a number of benefits over funding out of pocket. Many lenders offer a wide range of loan sizes, so you can invest in minor updates to major renovations.

Home Equity Line of Credit (HELOC):

If you need a loan only for repairs but don’t have great credit, a HELOC may provide a lower rate. Tread carefully; If you can’t make payments, the bank can seize your home.

Government Loans:

In addition to the standard FHA 203k program, there is a 203k “streamlined” product for smaller repairs. Additionally, there are Title 1 loans wherein you can borrow up to $25,000 for repairs on a single-family home. However, not all FHA mortgage lenders are approved to make Title 1 loans.

Ready to renovate your fixer upper? SoFi offers both mortgage refinancing and personal loans at competitive rates. You can pre-qualify online in just two minutes.

SoFi Lending Corp. is licensed by the Department of Business Oversight under the California Financing Law, license number 6054612. NMLS #1121636.
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