Can You Buy a Fixer Upper With an FHA Loan?

You can purchase a fixer-upper using an FHA loan, primarily through the Federal Housing Administration’s (FHA) 203(k) loan program. This specialized mortgage allows borrowers to finance both the acquisition of a home and its renovation costs into a single mortgage. This provides an opportunity to acquire properties that may not qualify for standard financing due to their condition.

FHA Property Standards for Fixer-Uppers

Properties financed with an FHA loan must adhere to specific FHA Minimum Property Standards (MPS), ensuring the home is safe, secure, and structurally sound. While a fixer-upper may not meet these standards initially, the FHA 203(k) program is designed for homes that will meet MPS after planned repairs are completed. This differs from a standard FHA loan, where the property must meet all standards at the time of appraisal. The FHA appraisal for a 203(k) loan assesses the property’s value both “as-is” and “as-repaired,” with the latter reflecting its value after renovations.

For a property to be eligible, it must not pose unmitigated health and safety hazards that cannot be reasonably addressed by the loan. For example, severe structural damage making a property uninhabitable or lacking basic utilities might be ineligible if repairs are too extensive or cost-prohibitive. The FHA appraiser plays a crucial role in identifying deficiencies and determining if the property, post-renovation, will satisfy FHA requirements. Acceptable repairs often include addressing a damaged roof, outdated electrical or plumbing systems, and some structural deficiencies like foundation repair. The property must also have adequate access to a public or private road, and key systems like heating, electrical, and plumbing must be functional or made functional through the renovation.

Understanding the FHA 203(k) Loan

The FHA 203(k) loan is designed to combine the home’s purchase price and eligible repair costs into one mortgage. This allows borrowers to acquire properties requiring significant work, which might otherwise be difficult to finance conventionally. The loan amount is based on the home’s appraised value after proposed renovations, or the purchase price plus renovation costs, whichever is less.

There are two types of FHA 203(k) loans: Streamline (Limited) and Standard (Full). The Streamline version is for minor, non-structural renovations, typically allowing up to $35,000 in repair costs. Eligible repairs include cosmetic updates like painting, flooring replacement, kitchen or bathroom remodels without structural changes, and energy-efficient upgrades.

The FHA 203(k) Standard loan is for more extensive projects, including major structural alterations, room additions, or connecting to public utilities. This loan has a minimum repair cost of $5,000 and can cover complex work such as foundation repairs or converting a single-family home into a multi-unit property. Unlike the Streamline version, the Standard 203(k) loan requires oversight from a HUD-approved consultant to manage the renovation process.

Applying for an FHA 203(k) Loan

Borrowers must meet general FHA loan eligibility criteria, which include a minimum credit score, typically 580 for a 3.5% down payment, though some lenders may require 620-640. A higher down payment, such as 10%, may be required for credit scores between 500 and 579. Borrowers also need to demonstrate sufficient income and a manageable debt-to-income (DTI) ratio, generally capped around 43%, though some flexibility may exist with compensating factors. The property must be intended as the borrower’s primary residence.

The application process begins by finding a lender experienced with FHA 203(k) loans, as not all FHA-approved lenders offer this program. Once a suitable property is identified, borrowers must obtain detailed bids for renovation work from a licensed contractor. FHA 203(k) loans require the use of a qualified, licensed contractor. Borrowers cannot perform the work themselves unless they are a licensed general contractor and meet specific criteria.

After submitting the loan application, a specialized FHA appraisal is conducted. This appraisal determines the property’s value after proposed renovations, which is used to calculate the maximum loan amount. The loan then undergoes underwriting, and upon approval, closing occurs. After closing, renovation funds are held in an escrow account and released in scheduled draws as construction milestones are met and verified by inspections. The renovation work typically must begin within 30 days of closing and be completed within a specified timeframe, often six to twelve months, depending on the loan type.