Renovation Loans 101 – Your Complete Guide to Understanding FHA 203k Loans

If you’re reading this, your probably in one of the following stages in your life: Either you currently own a home & want to renovate, you’re thinking of buying a “fixer upper” as your home, you want to sell your house & buy a home that needs a little work, or your home is on the market, but it just won’t sell!

1st things 1st, we can help with all of the above, but let’s start by asking:

“What makes a Renovation Loan (FHA 203k) different from a Traditional mortgage?”   

A “Traditional Mortgage” is one that the lender only approves based on the current value & condition of the property.  If you find a home (foreclosure) that might truly be worth $300,000, but have arcommon-sense-scream2ranged for a purchase at $210,000 (great deal btw!) the traditional lender will only lend up to the $210,000 your contract price).  Now, say it’s not a necessary fix, but you want  to upgrade the kitchen & add new windows.  Even though there is already equity in the property, with a Traditional mortgage you would have to pay for the upgrades with your own money.  Common sense may scream “There’s $90,000 worth of equity in the property, why can’t I just include it in the loan?!?!”  The traditional lender doesn’t care…your contract price = the max loan amount.

Here’s the great part…using the same purchase scenario as above, a Renovation Loan (FHA 203k) WILL allow you to make all of the upgrades AND include them in your loan. A FHA 203k Renovation loan lends based on the AFTER-IMPROVED market value of your upgrades/renovation…not the current value.  This changes the game completely!!!  Instead of having to bring an extra $40,000 to closing (assuming that’s what the kitchen & windows cost), now it’s included in the loan and you keep your money in the bank!  Let’s talk about a few more real world examples…

I own a home, but want to renovate…  

Maybe you’ve been watching a lot of ABC’s “Home Extreme Makeover” and want to turn that old 70’s kitchen into the new bright, shining, stunning kitchen of 2008.  You want to knock a few walls down, replace the fextreme-makeover-home-edition-season-1looring with hardwood, new appliances, granite countertops, etc… You have primarily two options.  If you already have enough equity in the home, you can simply do what’s called a “Cash Out refinance” – which means we refinance the current mortgage and pull enough cash out to pay for the projected renovation…that simple.  But, what if you don’t have enough equity in the property to pay for the renovation? That’s where the FHA 203k comes in…  Say your home is currently worth $200,000 and you owe $190,000.  You only have $10,000 worth of equity ($200k – $190k) which is not nearly enough to cover the projected $50,000 (example) cost of renovating.  But, say the improvements will cause your home’s value to skyrocket to $270,000 once they’re complete, versus the current value of $200,000.  We would lend on the AFTER-IMPROVED value and simply include the cost of renovation with your current mortgage balance for a total loan amount of $240,000 (original balance of $190k + $50k improvements)…and now instead of having $10,000 of equity…you have $30,000 (new value of $270k – new mortgage of $240k)!! 

My home’s on the market, but it just won’t sell…photo-sold

Often times, when prospective buyers are walking through “Open Houses” or visiting potential new homes they are stalled by the blemishes or older characteristics…even though the property may be wonderful for them.  It’s difficult for them to maybe see the true potential simply because the windows need to be replaced, or the HVAC system is old, maybe the plumbing needs updated, or even the roof needs replaced – but the current seller may not have the funds needed to make those improvement prior to selling. 

Think about your home through the eyes of a new buyer… Are there traits that may need to be updated?  If so, have your Realtor partner with an FHA 203k Renovation expert to draft a glimpse of what the property could be like AFTER the improvements, that a prospective buyer may want, are complete.  Show them the pot of gold at the end of the rainbow!  Educate the buyers that their improvements CAN be included now in their purchase!  YOU WOULD BE AMAZED AT HOW MANY REALTORS DO NOT KNOW THIS OPTION EXISTS!!! 

I’m thinking of buying a “fixer-upper”…

housefront1_150pxJust as we talked about above, this is a great option!  With a traditional mortgage, you would have to pay for any of the improvements with cash out-of-pocket in order to buy a property that needed some TLC. 



Now, instead of using out-of-pocket cash to make the improvements, use the Renovation Loan to purchase & allow the equity to work for you!


What can the FHA 203k Renovation Loan be used for?

There is a LONG list of eligible improvements allowed for the 203k.  Pretty much, the only things that wouldn’t be allowed are luxury items that can’t be included as a permanent piece of the property (i.e. 60” Plasma TV’s, etc…).  But, here are a few that can be included:

  • Bathroom remodels
  • New Siding
  • Attic build-outs
  • Adding a 2nd floor
  • Granite countertops
  • Bedroom Remodels
  • Upgrading HVAC
  • Going GREEN! (Solar panels, energy efficient appliances, etc…)
  • Many, Many, Many MORE!!!!

Now, What’s the Loan Process Like?

chuck-norris-approvedApply for Pre-Approval!!!! I honestly can not stress this step enough.  I’ve seen it many times…couples get excited about renovating, they’ve designed the kitchen, picked out the appliances, selected the contractor…only to then find out they can not be approved.  Granted, the requirements are less stringent than a conventional mortgage…but that does not mean everyone will be approved.  So please, do yourself a favor & talk with a Mortgage Planner first…plus…I like joining in on the fun of watching you go through the designing process… J

Here’s what needs to happen (preferably in this order):

  • Call Josh Perrington @ 540.904.0842 or email to Apply for Pre-Approval
  • On-site consultation with Appraiser, Contractor, & Mortgage Planner
  • Receive bids & Architectural designs (if needed)
  • Property Appraised
  • Loan submitted, underwritten, & conditions cleared
  • Loan closed & repairs begin
  • Total Loan Time: 30 – 45 Days!!!!

The process for qualification, approval, and fund disbursement is really quite easy on your part.  If you look at the process through the eyes of the lender, it becomes more of a common sense approach than anything else.  If you were the lender and planning to give money to a family, you would want to know that someone in that family has a stable job, has shown their ability to pay loans in the past, and has enough resources currently to stay on time with their payments.  That’s it! Obviously, there are a few other small items that would need to be addressed, but leave that to us…

Wrapping up…

This loan absolutely has the potential to create personal wealth and a huge amount of equity from day one.  Even more significant, it gives a sense of hope & renewal to families in an economic environment that does not foster such characteristics at the moment.  I’m passionate about helping others turn the house they have…into the home they want!

Feel free to call or email us anytime with questions…we’re here to help, and remember, a pre-approval is always free!


Josh Perrington – FHA 203k Renovation Sr. Mortgage Planner | | 540.904.0842 | Roanoke, VA


~ by joshperrington on November 29, 2008.

2 Responses to “Renovation Loans 101 – Your Complete Guide to Understanding FHA 203k Loans”

  1. Great post. I will read your posts frequently. Added you to the RSS reader.

  2. […] Unless you have an endless supply of cash lying around…start looking at the next best thing…a Renovation Loan (FHA 203k)!! […]

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