Feb 24 2022

Refinancing With 203K Renovation Loans

Do you have a home that could use some serious updates? If so, FHA 203k refinancing may be the solution you seek.

Do you have a home that could use some serious updates? And maybe you don’t have the cash on hand to pay for these renovations out of pocket. If so, FHA 203k refinancing may be the solution you seek.

How does 203k refinancing work?

Even if the mortgage you currently have isn’t an FHA loan, you can still take advantage of refinancing that’s backed by the Federal Housing Administration. With an FHA 203k loan, you can borrow money to cover renovation costs and roll that sum into the monthly payments of your existing mortgage. A move may makes sense given today’s low interest rates. These 203k refinance loans often have low down payments (3.5% is the minimum) and low credit score requirements. Add in competitive interest rates compared to many other types of loans and you’ve got a great option to give your home a much-needed upgrade.

The Two Flavors of 203K Refinancing

There are two options with FHA 203k refinancing: Limited 203k loans and Standard 203k loans. Overall, they’re similar but do have key differences.

  • A Limited 203k has no minimum dollar amount and is capped at $35,000, while a Standard loan has no upper limit, but a minimum loan amount of $5,000.
  • Limited 203k loans are for smaller projects and can’t be used for major structural upgrades; Standard 203k loans are meant for major renovations.
  • Limited loans have more flexibility in choosing contractors, while Standard 203k loans require licensed contractors.
  • Projects under $15,000 don’t require inspections with Limited loans, while all work with Standard 203k refinancing, no matter the cost, requires inspections.

Home Improvements With FHA 203Ks

Cash-out isn’t the only option for home improvements; FHA 203K Rehabilitation Loans are designed specifically for this purpose, from upgrades, such as bathroom and kitchen makeovers, to significant reconstruction. And your initial mortgage doesn’t have to be an FHA Loan — anybody can do refinancing using an FHA 203K. There are two types of 203K refinancing: limited and standard.

  • Limited 203K refinancing goes as high as $35,000. If projects come in under $15,000, inspections aren’t required. But you can’t do most major structural work with a Limited 203K. For those, you need a Standard 203K.
  • Standard 203K refinancing starts with projects that cost $5,000 and is usually for big stuff like replacing plumbing systems or adding on extra rooms.

Are there any requirements that I should know about?

A few. The list of eligible home-improvement projects with 203k loans is long, ranging from plumbing, roofing, and flooring to landscaping, a host of energy-efficient improvements, and more. But luxury upgrades aren’t allowed. So no swimming pools, tennis courts, hot tubs, barbecue pits, and the like. While home offices are fine, you can’t use 203k loans to turn part of your home into a commercial business. 203k loans require FHA mortgage insurance. And there are closing costs with FHA 203k loans, which are about the same amount as one would pay with other refinancing methods.

Most Popular Home Improvements

So you know that your home could use some major upgrades. And have the means to pay for them with 203k refinancing. You’re probably considering big structural stuff such as roofs and plumbing and heating systems, which often top the upgrade lists of many homeowners. Where else might you want to put your refinancing dollars? Here are some top home improvement projects to consider:

  • Windows. Replacing old windows with new energy-efficient ones makes financial sense; the U.S. Department of Energy estimates that windows often account for 25% to 30% of heat loss and gain in homes. Beyond upgrades, adding more windows is a popular trend, with homeowners installing skylights, floor-to-ceiling windows, and even replacing entire walls with glass.
  • Home offices. Millions of office workers shifted to telecommuting with the onset of the coronavirus pandemic. And many will stay that way, making home offices more important than ever. From converting an existing space, such as a bedroom, to add-on construction, creating a dedicated at-home workspace is a practical idea.
  • Flooring. Replacing old worn-out carpets with new ones is a popular home upgrade. And while carpeting remains a top choice for many, other flooring trends are on the rise. Today’s luxury vinyl isn’t like the flimsy stuff from the old days, with modern high-quality vinyl flooring that is nearly indistinguishable from wood, stone, and ceramic. And traditional wood flooring is always a great way to go.
  • Disaster preparedness. As weather events related to climate change are increasingly bearing down on homeowners, fortifying homes against Mother Nature has become more common. These upgrades include flood-mitigation measures such as increased drainage and installing flood-proof windows and sea-wall barriers, as well as backup power systems, storm shutters, and more.

Using 203K Loans for Investing

While 203k rehabilitation loans are designed for primary residences, there are some ways they can be used for investment properties. One way is to refinance the mortgage on the home you live in, using the loan to make renovations on that residence. Then, one year after the loan closes, you may move out and rent the home to someone else. With some stipulations. The FHA requires that your move has to be for a legitimate reason, such as the need to relocate for a new job or the very real need for more space with a growing family. In essence, it’s possible if you planned to stay in the home for more than a year, but factors beyond your control changed that plan.

It’s also possible to use 203k loans for purchasing investment properties. Savvy investors may wish to use 203k loans to purchase fixer-uppers with the intention of flipping the properties for profits. However, that’s not feasible; 203k mortgages, whether they are for purchases or for upgrades on existing properties, are restricted for use with primary residences — the borrower must reside at the property. But it is possible, and common, for the owner of a property to live there and utilize the rest of the property as an investment with rental units.

According to FHA rules, a borrower can purchase a multi-family building with two to four units, or a structure that they’ll convert into a similar multi-unit property, using a 203k. On the condition that the borrower lives in one of the units for at least 12 months. After that? Then the borrower is free to move out (again, conditionally) and rent the unit that they once lived in. It’s worth noting that one can’t accumulate investment properties this way, by merely living in each newly acquired multi-family building for a year and moving on. A few exceptions aside, FHA 203k loans are one-at-a-time deals.

Whether it’s desperately needed home repairs or paying for improvements that make your dream home all the more dreamy, City Lending is here to meet your needs with the renovation loan that’s perfect for you.

These days, more and more people are looking to buy their dream homes, especially as remote work and work-from-home setups have become an enduring trend. A 15 point increase in requests for home tours and other home-buying services, along with a 11% rise in Google searches for homes, indicate an uptick in demand to buy houses in the country. However, there is a definite worry about affordability when it comes to housing, especially as hefty price tags on available residences have kept the market just as competitive as before, if not more.

According to the latest reports from analysts, it’s not all bad for existing homebuyers and aspiring house hunters. As previous data shows, timing matters in the housing market, and working on different approaches to home buying – like through a reliable lender – can help advance you towards more affordable housing goals. Below, we discuss whether house hunters should buy now or wait, and why.


What is your financial situation?

Counter to the rise in home demand, there is a considerable lack of supply. Along with rising prices and interest rates, the housing market may seem like a highly competitive space with wealthy homeowners fighting for what little property is left. It can be overwhelming, but knowing where you stand financially can help you better strategize your home buying journey. Following the four key components of affordability, ask yourself:

  • How much do you have saved for a down payment?

  • How much does your household earn?

  • What debts do you carry?

  • What is your credit score?


Familiarizing yourself with these components will help inform your decision on whether or not to wait. For example, taking the time to improve your credit scores before committing can save you from higher interest rates in terms of your monthly mortgage payments. Alternatively, many young homebuyers are compromising by living with family for a significant amount time to save up for a down payment. Getting this out of the way when you’re able to can help you get better loans to buy sooner than later in case interest rates end up increasing.

What kind of home is best for you?

Buying a home is a huge purchase and a big commitment. With shifts to digital and remote ways of working taking place in recent years, this has provided homebuyers with opportunities to be more flexible when buying homes. Homes in areas away from busy cities and urban hubs, for example, are considerably cheaper. This makes them a perfect option for buyers who work from home, or aren’t required to be present in the office on a consistent basis.

The lifestyle you expect to live is as much a factor to consider as money. Condos and townhouses offer lower maintenance costs in the long run, and are perfect for smaller households when compared to single-family homes. If the household grows, homebuyers looking for a side income can even invest in renting out purchased properties to passively earn back what they spent and look into bigger properties for family use.

What does the future look like?

In a previous post, we talked about the rising mortgage and interest rates. While the market may seem bleak or intimidating in its current condition, housing experts also believe factors such as supply have a high chance of returning to pre-pandemic levels by the end of 2024. If you are financially able, buying now while others may be intimidated by the prices can give you an edge. Conversely, taking some time to get your finances in order can benefit you when it comes to securing better loans and lower interest rates.

Working with experts can help you make better decisions for the loans you need, making sure you don’t get trapped with high interest rates or hidden charges. The future of fintech suggests that big data is the future of loans, as more online lenders are now using algorithms, which predict potential defaults better than FICO scores do. Data is also leveraged precisely to identify customers who fit various products well — which can give you peace of mind, as an aspiring borrower. Here at City Lending for example, we find the right programs to fit your needs and profile, making sure you get some of the lowest down payments and interest rates along with a premium service.

And if you’re still unsure, it’s worth considering that waiting it out in the market’s current wild conditions could result in even higher interest rates in the future. At the end of the day, buying a house is ultimately a huge investment, which comes with benefits such as privacy and a financial investment that for the most part will weather most economic storms.

Find out if this is the right time for you to get a house by contacting one of our loan officers today.


Content intended only for the use of citylendinginc.com

Written by Alicia Christopher

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