• It can be a real problem to secure financing when you find that diamond-in-the-rough house. In your mind's eye, you just know it will be the belle of the block, but lenders don't seem to share that vision.

    Even if you are able to get financing to purchase the house, you still face the daunting task of securing a second set of financing for the rehab.

    It's not widely advertised, but something called the FHA 203(k) loan might be just the ticket to not only get that renovation loan but to streamline the process so that you're not spending more time talking to lenders than you are to architects and contractors.

    Be forewarned that the FHA 203(k) loan isn't for everyone--even for those who qualify--due to the inevitable red tape.

    What is a FHA 203(k) Rehab Loan?

    It's an all-in-one mortgage loan and remodel loan issued by mortgage lenders and insured by the U.S. Department of Housing and Urban Development (HUD).

    Does the United States government want you, personally, to be able to fix up that dream fixer-upper?

    No, not really. But the U.S., via HUD and the FHA 203(k) program, is concerned about the big picture: revitalizing entire communities and making sure that the nation's stock of existing houses does not implode. But you personally can benefit from these wide-ranging motives.

    Tip: Does all this sound too complicated? HUD acknowledges this, and has instituted a program of certifying independent 203(k) consultants (link below) who can smooth the process for you.

    2 Steps Combined: Purchase and Remodel

    Homeowners typically first find a house that needs tender loving care. They get a first mortgage loan that covers only the purchase price of the house, nothing more, which is the way all first mortgages work. Lenders won't just hand out an extra $50,000 on the asking; it would be a miracle if they did.

    Next, the homeowner gets a second mortgage or HELOC (home equity line of credit) to pay for the remodels.

    Equity Gap Solved

    One problem with this is that you need to first build up some equity in the house before you can take out another loan on it. A worse alternative is to get an unsecured or signature loan for that remodel work. Even if you can get an unsecured loan, interest rates will be far higher than if you get a loan that uses your home as collateral.

    But the FHA 203(k) Rehab Loan is a bit like that miracle loan we mentioned. You get money to buy the house and extra money to remodel the house.

    Your intended house--given its condition--cannot act as proper security (i.e. collateral) for the mortgage loan. What HUD/FHA does is fill in that gap between the house's current equity and the amount of the loan by insuring the loan. In essence, it's like the rich uncle who steps in and says, "I will act as a backer for this loan until the house can be improved."


    • One Loan, Not Two: One initial mortgage loan covers purchase and remodel.
    • Good Push to Get Started: Because the program expects you to use the money for rehab, you must get started within a reasonable amount of time. This avoids procrastinating for years.


    • Longer Closing Period: Because of program requirements, your closing period ranges from sixty to ninety days.
    • Limited Choice of Lenders: You cannot choose any lender. Instead, you need to work off of HUD's list of approved FHA 203(k) lenders.
    • Red Tape: In order to qualify for the loan, you will need to submit a detailed proposal, including architectural drawings.

    10 Allowable Renovations

    The allowed remodels sounds restrictive at first. But keep in mind that these definitions can be stretched and still remain legitimate remodels.

    HUD is concerned that 203(k) monies not be used for "luxury items and improvements," as they put it. Yet they also stress that "painting, room additions, decks and other items even if the home does not need any other improvements" will fall within the scope of 203(k). Allowed projects:

    1. Remodels for a disabled person.
    2. Modernize an outdated home.
    3. Improve your home's energy efficiency.
    4. Landscaping and other exterior site work.
    5. Roof, gutter, and downspout installation or replacement.
    6. Alter the home's structure and/or reconstruct the home.
    7. Eliminate safety hazards.
    8. Aesthetic improvements.
    9. Plumbing improvements, including well and septic system work.
    10. Floor additions/replacements (includes floor treatments).