Home Rehab Loans (Section 203k)

For home rehab activities that do not also require buying or refinancing the property, borrowers may also consider a Title I Home Improvement Loan.


Section 203k Home Rehab Loans (also called home rehabilitation loans or mortgages) are loans made by private lenders that are insured by the Federal Housing Administration (FHA), part of the U.S. Department of Housing and Urban Development (HUD).

Through a single rehab mortgage, you can:

  • Purchase or refinance a home
  • Include the cost of making repairs or improvements
  • Include allowable closing costs

You can obtain a rehab loan as a 15- or 30-year fixed-rate mortgage or as an adjustable-rate mortgage (ARM) from a HUD-approved lender, and the loan down payment requirement is approximately 3% of the home acquisition and repair costs. The amount of the loan may include a contingency reserve of 10% to 20% of the total remodeling costs, used to cover any extra work not included in the original proposal.

The total amount of your mortgage will be based on the projected value of your home after the renovation is completed, taking into account the cost of the work. A portion of your loan is used to pay for the purchase of the home, or in the case of a refinance, to pay off any existing debt. The remainder is placed in an interest-bearing escrow account on your behalf and released in stages as rehab is completed.

FHA requires that you use a minimum of $5,000 toward eligible repairs or improvements and that you complete the repairs within six months after the loan’s closing depending on the extent of work to be completed. This first $5,000 primarily covers eliminating building code violations, modernizing, or making health and safety-related upgrades to the home or its garage. You may add minor or cosmetic repairs after this requirement is satisfied, if applicable. You cannot include improvements for commercial use or luxury items, such as tennis courts, gazebos, or new swimming pools.

If you are not planning to live in the home during construction, you may finance up to six months of mortgage payments during the renovation period. In addition, you may act as your own general contractor or do the actual repair work yourself, if you are qualified. Any money you save this way can be used for cost overruns or additional improvements. You can be reimbursed only for actual material costs, not for your own labor.

Homes must be at least a year old, and the total value of the property must fall within the FHA mortgage limit for the area. The FHA maximum loan limit for the area may be exceeded by the cost of energy efficient improvements, and the mortgage is eligible for an increase of up to 20 percent in the maximum insurable mortgage amount if such an increase is necessary for the installation of solar energy equipment. However, the entire mortgage cannot exceed 110 percent of the value of the property. The value of the property is determined by either (1) the value of the property before rehab plus the cost of rehab, or (2) 110 percent of the appraised value of the property after rehab, whichever is less.

Section 203(k) rehab loans are provided through FHA-approved mortgage lenders nationwide, which include many banks, savings and loan associations, credit unions, and mortgage companies. Unlike other FHA single-family mortgages, Section 203(k) borrowers do not pay an upfront mortgage premium. However, lenders may charge some additional fees, such as a supplemental origination fee, fees to cover the preparation of architectural documents and review of the rehab plan, and a higher appraisal fee.

Rehab Loans: Saving Time and Money

Most mortgage financing plans provide only permanent financing. That is, the lender will not usually close the loan and release the mortgage proceeds unless the condition and value of the property provide adequate loan security. As a result, the purchase of a house that needs repair is often a catch-22 situation, because the bank will not provide a long-term mortgage to buy the house until the repairs are complete, and the repairs cannot be done until the house has been purchased.

In such situations, homebuyers usually have to follow a complicated and costly process, first obtaining financing to purchase the property, then getting additional financing for the rehab work, and finally finding a permanent mortgage after rehab is completed to pay off the interim loans. The interim acquisition and improvement loans often have relatively high interest rates and short repayment terms.

A Section 203(k) rehab loan, however, lets the borrower get just one mortgage loan, at a long-term fixed (or adjustable) rate, to finance both the acquisition and the rehab of the property.  Section 203(k) insured loans save borrowers time and money, and also protect lenders by allowing them to have the loan insured even before the condition and value of the property may offer adequate security.

The information provided in this website is not legal advice and should not be interpreted as legal advice. This website is intended to provide a basic understanding of this information in summary form. This information may not be comprehensive, is subject to change, and may not apply to all individual circumstances. Any information received here should be confirmed with the appropriate government agencies or with an attorney, particularly as it relates to your individual circumstances. Your use of this website indicates your agreement to be bound by our Terms of Use.