Improvement Tool – The Federal Housing Administration’s 203(k) Program

The Federal Housing Administration’s 203(k) program is a valuable, if little known, incentive for buyers to purchase distressed properties.


Distressed properties

accounted for 36 percent of

all home sales in 2009.




Nearly 4 million foreclosure filings — default notices, scheduled foreclosure auctions and bank repossessions — were reported on 2.8 million U.S. properties in 2009, according to RealtyTrac, an online marketer of foreclosure properties. That’s a 21 percent increase in total properties from 2008 and a 120 percent increase from 2007.  Most of these foreclosed properties eventually end up on the market, often at substantial discounts that might attract buyers looking for a bargain. Still, some homebuyers are reluctant to invest in a “distressed property” (either a foreclosure or a short sale), especially if the home has fallen into disrepair.  But a key government program, the 203(k) loan, has the potential to make foreclosed properties much more attractive to potential buyers. 

How It Works 

Created by the U.S. Department of Housing and Urban Development (HUD) in 1978, the 203(k) is an FHA-guaranteed loan that provides funds to help buyers purchase and renovate a home. Often when a homebuyer wants to purchase a house in need of repair or modernization, the homebuyer has to obtain financing to purchase the dwelling, additional financing to complete the rehabilitation construction, and a permanent mortgage when the work is done to pay off the interim loans.  That interim financing (the acquisition and construction loans) often involves relatively high interest rates and short amortization periods.  In the 203(k) program, a borrower can obtain just one mortgage loan, at a longterm fixed (or adjustable) rate, to finance both the acquisition and the rehabilitation of the property. To provide funds for the rehabilitation, the mortgage amount is based on the projected value of the property when the work is complete, including the cost of the work.  A 203(k) loan requires a 3.5 percent down payment and follows standard FHA guidelines and loan limits, which range from $271,000 to $729,750 for 15- or 30-year mortgages. To be eligible, the property must be a one- to four-family home that is at least one year old. 

Here’s an example: A 203(k) could help a couple buy a $150,000 house that needs $25,000 worth of qualified repairs. An FHA-approved appraiser would estimate the cost of the necessary improvements, and the buyers would secure bids from contractors before finalizing the loan. Then the buyers apply for a mortgage plus the cost of the repairs up to $35,000 and put money into escrow at closing to be paid out to the contractors upon completion of the work. The repairs, which must be done within six months of closing, raise the home’s appraised value. If the repairs cost less than the applied-for $35,000, the remaining escrow funds go straight toward the principal loan’s bottom line, allowing the buyer to pay off the mortgage a little earlier. 

The 203(k) program should be a boon for any buyer considering whether to purchase a distressed property. And while the number of short sales and foreclosures on the market surely will decline as the housing market   rebounds, 203(k) loans will remain a valuable tool for buyers looking for “fixer-uppers” in any economy.


203(k): A Primer 

What: A 203(k) is a HUD/FHA-guaranteed loan that provides funds for the purchase and renovation of a home. 

Requires: A 3.5 percent down payment and compliance with standard FHA guidelines and loan limits (ranging from $271,000 to $729,750) for 15- or 30-year mortgages.  The streamlined 203(k) version of the program offers a simpler application process and less documentation for renovations up to $35,000. 

FHA loans: Are available to those with marginal credit; are easier to qualify for; can be processed with a down payment that is gifted; are assumable; and have no prepayment penalties.  Find more information at the U.S. Department of Housing and Urban Development Web site and at