FHA 203k Loan Rates: Everything You Need to Know

FHA 203k loan rates are typically 0.5-1% higher than typical FHA loans because 203k loans let you buy and fix up a house with just one mortgage. Since these loans are backed by the Federal Housing Administration (FHA), they’re a great option even if your credit isn’t perfect.

In this guide, we look at how the interest rates for this loan compare with regular FHA loan rates. Plus, we’ll explain the different types of 203k loans, what kinds of renovations each one covers, and more.

What Is an FHA 203(k) Loan?

An FHA 203(k) loan is a government-backed mortgage that combines the costs of buying and fixing up a house into one single loan. It’s an excellent choice if you want to buy a home and need to make repairs or renovations.

This type of loan is designed to help you turn an older property into your dream home. It is especially helpful for lower-income households because it makes it easier to buy and upgrade a primary residence without needing to juggle multiple loans. So, if you’re looking to purchase a fixer-upper and make it your own, an FHA 203(k) loan might be just what you need.

What’s the Difference Between FHA 203(k) and Regular FHA Loan?

You’ve probably heard of an FHA loan and how it’s great for first-time home buyers. But how does it differ from the FHA 203(k)?

The major difference between an FHA 203(k) loan and a regular FHA loan is that the 203(k) loan is specifically designed for buying and fixing up a home. It’s most suitable if you’re eyeing a place that needs some serious repairs because it lets you finance both the purchase and the renovation costs all in one mortgage.

On the other hand, a regular FHA loan just covers the purchase price of the home without any extra for renovations. Here’s a quick rundown of the differences:

• Purpose: FHA 203(k) loans are for buying and renovating a home, while regular FHA loans are just for buying a home.
• Renovation Costs: With FHA 203(k) loans, you can include the costs of repairs and upgrades, but regular FHA loans don’t cover those.
• Loan Limits: FHA 203(k) loan limits depend on where you’re buying, but regular FHA loan limits are usually higher.
• Eligibility: It’s much easier to qualify for an FHA 203(k) loan with lower credit score and down payment requirements, while regular FHA loans require better credit scores and lower debt compared to your income.
• Mortgage Insurance: FHA 203(k) loans require both upfront and yearly mortgage insurance payments that last for the entire loan period unless you refinance. With regular FHA loans, you’ll need to pay private mortgage insurance (PMI) if you put down less than 20%, but you can drop it once you build up enough equity.

RenoFi Loans as an Alternative to FHA 203k Loans

As an alternative to an FHA or FHA 203k loan, RenoFi offers a new solution by letting you borrow against the future value of your property post-renovation, rather than borrowing against its current value. 

While RenoFi loans are similar to an FHA 203(k) loan in that it is used to fix up a home, the loan limits through RenoFi are much higher because your loan limit is based on your home’s after renovation value versus the pre-renovation value. 

RenoFi loans allow you to take out a conventional mortgage to purchase a property and then stack a RenoFi loan on top of your current mortgage because the RenoFi loan uses the after renovation value which allows you to borrow much more than through a conventional loan.

For example, imagine your home is currently valued at $500,000, and your outstanding mortgage balance is $400,000. You are planning a renovation and expect that the after renovation value of your home would be approximately $640,000. Your current loan-to-value ratio (LTV) is at 80%, which means that you effectively can’t borrow anything to fund your renovation.

A RenoFi loan, however, would allow you to go as high as 150% LTV or 90% LTV using the after renovation value. So, in this example, while using a standard home equity loan results in your borrowing power being $0, a RenoFi loan allows you to borrow up to $176,000, thanks to the after renovation value of your home.

If you’re considering a home renovation and need a loan option that gives you greater borrowing power, exploring RenoFi’s options might be the perfect solution for you.

Overview of FHA 203(k) Loan Rates

FHA 203(k) loans usually come with higher interest rates compared to regular FHA loans. Why? Because these loans cover both buying a home and paying for renovations. This puts lenders in a riskier position, so it makes sense that they bump up the interest rates a bit to protect themselves. On average, FHA 203k loan rates are about 0.75% to 1.0% higher than the typical rates for standard FHA loans.

Loan Options

Although the interest rates for FHA 203(k) loans can be a bit on the high side compared to regular FHA loans, you’ve got choices. You can go for a fixed-rate loan. With this option, your interest rate stays the same for the entire loan period. Alternatively, you can opt for the adjustable-rate mortgage (ARM) option, which might start with a lower rate but could change later on.

Additional Fees

Keep in mind that there are usually some extra fees that come with FHA 203(k) loans. For example, there’s the supplemental origination fee, which usually varies depending on your lender. Aside from that, you’ll likely pay other fees, such as the mortgage insurance premiums (MIPs). There are two types:

• Upfront Mortgage Insurance Premium (MIP): This is a one-time fee that’s 1.75 of your loan amount, and you can roll it into the mortgage.
• Annual Mortgage Insurance Premium (MIP): This is an ongoing fee of about 0.85% of your loan amount, paid monthly.

Who Can Get an FHA 203k Loan?

To qualify for the FHA 203(k) loan, you’ll need to meet the following eligibility requirements:

Credit Score

The FHA 203(k) loan offers some flexibility when it comes to credit score requirements. If your credit score is 580 or higher, you could be eligible for a down payment as low as 3.5%. 

You may still qualify if your credit score falls between 500-579, but you’ll need to put down a higher down payment. Keep in mind that many lenders have their own credit score requirements. Some require around 620 or above to increase the chances of approval.

Down Payment

The FHA 203(k) loan allows for some of the lowest down payment options. If your credit score is 580 or higher, you could put down as little as 3.5% of the purchase price plus renovation costs.

Debt-to-Income (DTI) Ratio

For the FHA 203(k) loan, you’ll typically need a DTI below 43%. In other words, your monthly debt payments (including the new mortgage) can’t exceed 43% of your gross monthly income.

Property Requirements

The property you’re buying needs to meet certain criteria. The FHA 203(k) loan is designed for primary residences, so the property has to be a one-to-four-unit dwelling that you plan to live in. Also, the property must be at least a year old, and the total loan amount can’t exceed FHA loan limits for the area.

Extra Requirements

Lastly, there are a few additional requirements to keep in mind, including:

• If you’ve had a foreclosure in the past, at least three years must have passed since then.
• You’ll need to work with an FHA-approved lender to obtain the 203(k) loan.
• For the Standard 203(k) loan (which covers more extensive renovations), a HUD-approved consultant is required to oversee the renovation project.

Types of FHA 203(k) Loan

FHA 203(k) loans come in two main types: standard 203(k) and limited 203(k). Keep in mind that both loan types are strictly for borrowers who plan to make the property their primary residence. In other words, you don’t qualify if you’re a house flipper or real estate investor.

Standard 203(k)

The standard 203(k) is for any major repairs or structural work your home needs, with no cost limit. The minimum you can borrow is $5,000, but the total property value still has to fall within the FHA mortgage limit for your area - search your state’s FHA mortgage limits on HUD.gov which can range $1M+ depending on property type and location. For example, an area with a higher cost of living, like San Francisco, has loan limits that match the conforming loan limit, which is around $1.1 million. 

Limited 203(k)

If your home doesn’t need much work, you’d typically go for a limited 203(k) loan. This option doesn’t cover structural changes, such as adding new rooms or landscaping. And the home has to be livable during the renovations. Repairs under the limited 203(k) are capped at $35,000.

Some of the repairs a 203(k) loan covers include:

• Plumbing, flooring, and painting
• HVAC systems
• Landscaping
• Bathroom and kitchen remodels
• Energy-efficient upgrades, safety improvements, and accessibility features for disabilities
• Adding new doors and windows

However, the loan doesn’t cover luxury projects like adding a new pool or a tennis court. No matter the loan type you opt for, the renovation work has to be done by a licensed contractor. But if you qualify as a handyman yourself, it’s okay to act as your own general contractor and do the repairs. That said, you can’t get reimbursed for your own labor costs.

Interest Rates for FHA 203(k) Loan vs FHA Streamline 203(k) Loan

When it comes to interest rates, the Standard 203(k) loan usually has a higher rate than the Streamline 203(k) loan. That’s because the Standard 203(k) lets you tackle major renovations, which are usually pricier and riskier for lenders.

Lenders hike up the interest on Standard 203(k) loans to cover the extra risk and higher costs that come with major renovation projects. Also, the longer project timelines contribute to the higher rate.

On the flip side, the Streamline 203(k) loans usually come with lower interest rates. They are designed for smaller fixes, making them less risky and cheaper overall for lenders. And because the work is simpler, the loan amounts are smaller, and the projects get done faster, lenders can afford to give out Streamline 203(k) loans at lower rates. This option is a great choice if you’re looking to finance smaller home upgrades without breaking the bank on interest.

Pros of FHA 203(k) Loan

• You can roll the purchase price and renovation costs into one loan, so you don’t need to take out multiple loans.
• It’s got flexible credit score requirements, so even if your credit isn’t perfect, you can still qualify.
• You can buy a fixer-upper at a discount and build equity right after the renovations.
• You only need a down payment of 3.5%, so it’s a good option for those with limited funds to buy a home in a competitive market.
• You might get lower interest rates compared to other home improvement loans.

Cons of an FHA 203(k) Loan

• You have to pay mortgage insurance premiums upfront and annually. This adds to the overall cost.
• You can’t save money by doing the renovations yourself; you need to hire licensed contractors.
• The property must be at least one year old and used as your primary residence, meaning you can’t use it for investment properties.
• It can be harder to find a lender since not all have experience with 203(k) loans or might have stricter requirements.

Alternatives to FHA 203(k) Loans for Home Renovations

Here are some other ways to finance your home renovation projects aside from using an FHA 203(k) loan.

RenoFi Loans

RenoFi loans are different than FHA 203(k) loans because you are allowed to borrow against the future value of your property post-renovation, rather than borrowing against its current value. By borrowing from the future value of your home, you are able to borrow the money that you need to renovate your home. 

If you’re considering a home renovation and need a loan that gives you greater borrowing power, exploring RenoFi’s options might be the perfect solution for you.

Fannie Mae HomeStyle Renovation Loan

The Fannie Mae HomeStyle Renovation loan might be a great option if you have a decent credit score (at least 620). This loan lets you combine the costs of buying and renovating your home into one mortgage. Some key perks include:

• Low down payment (typically around 3% if you’re buying your first home)
• Can be used for primary residences, investment properties, and vacation homes
• Fewer restrictions on the types of renovations compared to FHA 203k loans
• Potentially higher loan limits in some areas

Freddie Mac CHOICERenovation Loan

Similar to the HomeStyle, Freddie Mac’s CHOICERenovation loan lets you finance both your home purchase and renovation costs together. Here are some important things to note about the loan:

• Minimum down payment of 3.5%
• Eligible for investment properties, multi-unit properties, and second homes
• More flexible credit score and DTI ratio requirements

Personal Loan + Cash-Out Refinance Combo

You might want to consider a two-step approach if you’re not keen on the extra requirements of renovation loans. Start by taking out a regular mortgage and use a personal loan for renovations. Once the renovations are complete, you can then do a cash-out refinance to pay off the personal loan.

The downside? You’ll pay closing costs twice – once for the initial mortgage and again for the refinance. But it gives you more flexibility during renovations.

Is an FHA 203(k) Loan Right for You?

Considering FHA 203k loan rates are usually higher, should you go for it? It all comes down to what you want to do with your mortgage. Sure, you might get lower rates with a regular FHA loan, but think about the perks of an FHA 203(k) loan: it’s an all-in-one deal that covers buying a home and making upgrades. 

Plus, you can qualify with a small down payment. These benefits usually make up for the slight difference in rates, making it a great option for many borrowers interested in fixer-uppers.

At RenoFi, we can help you better understand your mortgage choices and connect you with the right lenders who truly know what you need. RenoFi loans are the smartest way to finance a home renovation project. Unlike traditional loans, which are based on your current home value or require you to refinance your primary mortgage and give up your low rate, RenoFi loans are based on the After Renovation Value of your home. This allows you to borrow on average 11x more, get a low monthly payment and keep your low rate on your first mortgage. 

If you need help, don’t hesitate to get in touch with us.