The Basics of a 203(k) Loan

by Chicago Agent

A National Renovation Lending Manager for Bank of America, Jim Ragan’s experience with renovation loans dates back to 1988.

With today’s housing environment and the volume of distressed properties on the market, buyers are seeing a surplus of affordable homes available for purchase. And while homes may be available, many are not “move-in ready,” or immediately suitable for homeowners. Homes that require repairs or updating or pose a threat to a home-owner’s safety are perfect examples of homes suitable for FHA 203(k) loans.

What is an FHA 203(k) Loan?

A 203(k) loan is a single mortgage loan which bundles together the costs of purchase, repairs, remodeling and/or improvements to the home.  The loan amount is based on the value of the home after renovation, and the loan requires a down payment of 3.5 percent, similar to other FHA loans.


Financing renovation with a 203(k) loan could provide a buyer with more benefits and options than they would have had otherwise. While “fixer-upper” homes may not appeal to all homebuyers, a 203(k) loan opens the door to:

  • A permanent mortgage for the acquisition (or refinance) of a one- to four-unit residential or mixed-use property.
  • The opportunity to see available homes that need anything from minor repairs to major renovations.
  • The money needed to buy and fix the home in a single loan.
  • The chance to consider a larger variety of homes, which ultimately broadens the potential buyer population.

Key Steps to Share with Homebuyers

It is likely the average homebuyer isn’t aware of the 203(k) loan option. When introducing this process to homebuyers, it is crucial to help them understand the following steps:

Homebuyers should know that their qualification must be for a product that will close as is and be based on a total loan amount (including repair costs), not just a sales price. You should also advise them to work with a Renovation Lending Specialist.

Help your homebuyers investigate the property condition and After Improved Value (AIV) to better predict the final loan amount after construction.

Buyers will need a licensed contractor who is also insured and capable to do the work.

Prepare them for the contractor package required by their lender to ensure they are fully prepared for what to expect throughout the process.

Jim Ragan is a National Renovation Lending Manager for Bank of America. Ragan’s experience with renovation loans dates back to 1988. Before joining Bank of America, Ragan managed renovation lending at The Bank of New York and was CEO of K Mortgage Corp., recognized by HUD as a top originator of FHA 203(k) loans throughout the 90s. Ragan has participated in many homeownership initiatives and served on HUD’s Lenders Committee, which advised the Department on improvements to the program.

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