Quote from @Jaren Woeppel:
Hey Andrew, welcome to the community! FHA 203(k) loans are a great way to get into a property, add value, and set yourself up for strong equity when you eventually rent it out.
Biggest things to watch out for:
1. Contractors & Timeline – The loan requires HUD-approved contractors, and the rehab process can take longer than expected. Make sure you’re working with a lender who has experience with 203(k) loans and a contractor who understands the program’s requirements.
2. Loan Process Can Be Slow – Unlike a standard mortgage, the lender will be heavily involved in the renovation funds, which means more paperwork and potential delays.
3. Strict Repair Guidelines – The work has to improve the home’s safety and livability, so luxury upgrades usually don’t qualify.
4. Living Through Renovations – If you go with a Limited 203(k) (up to $35K in repairs), it’s usually manageable, but for a Standard 203(k), major work might require you to live elsewhere for a bit.
It’s a solid strategy, just make sure you’re working with the right lender and contractor so things go smoothly.
Respectfully, majority of what you posted is inaccurate and misleading.
To clarify;
1. There is no such thing as "HUD-Approved contractors" or any type of certification required for contractors to perform 203k's or HomeStyle renovation loans. Any licensed, insured, and experienced contractor will qualify. I do agree that you should work with a lender that is deeply experienced with these loans. It also helps that the contractor has experience but is definitely not necessary. I've helped 100's of people do 203k's and majority of them worked with contractors that previously did not do a 203k. If a contractor has ever done commercial work or insurance work (90% of contractors that are legit have) then they're used to the process.
2. When you say the lender is "heavily involved" with the renovation funds, its no different than hard money. The renovation budget gets put in escrow and gets released in draws as the work is completed. This is how all professional construction is managed and handled. The money needs to go somewhere. It's released as work is completed. The additional paperwork is a draw request, which is handled by the 203k consultant.
3. The 203k does not have strict repair guidelines. It requires you to fix necessary items that permit occupancy, IE, functioning windows and doors, proper egress, working MEPs. You can get any level of finish or upgrades you want so long as it fits your budget. The only things you can't get are things like a pool, tennis court, and amenities that aren't integral to the house.
4. The limited 203k is no longer limited to 35,000 - it's now up to 75,000 in repairs, and thats for projects where there is no change to structure, IE, no moving walls, alterations, additions etc. It can be used to replace finishes - kitchens bathrooms, flooring, paint, etc.
If you have to live elsewhere while the work is being completed the 203k allows you to wrap up to 12 months mortgage payments into the loan if your approval/LTV allows for it. This gives you the opportunity to not have to pay out of pocket for a primary residence you can't occupy.
For @Andrew Miller - as someone that's done multiple renovation loans myself and helped 100's do the same, here are my biggest tips:
1. Work with a lender that is DEEPLY experienced with 203k loans. Not just "familiar". Would you want a honda mechanic to change the oil on your Porsche? Can the honda mechanic replace the oil on a porsche? Probably. But I'd rather work with the mechanic that works on Porsche's PRIMARILY. Not once in a blue moon.
2. Start building a contractor rolodex now. Get referrals from as many people as you can. I've worked in construction for 20 years and theres no such thing as a "go-to" perfect contractor. There will always be changes in their schedule, manpower, timelines etc.
That way, when you get a property under contract, you can call on the list and have ample contractors show to bid.
3. Once under contract on a fixer upper, the FIRST person to enter that property with you is the 203k consultant. Not the contractor. The 203k Consultant will inspect the property and create whats called a "Schedule of repairs" or SOR. That SOR will give you a line itemed breakdown of all the work that needs to be done to the property to get it up to code and liveable condition, as well as anything you'd like to do: upgrades, additions, alterations, etc.
The SOR should also have rough estimate values of how much each item should cost. NOTE: if your consultant asks you for a contractor bid first, get a new consultant immediately. That's a huge red flag and against HUD/FHA rules for the 203k.
The consultant should be able to provide an unbiased work write-up and work estimate on their own.
4. Once that SOR is finished, the consutlant can provide you what's called a 'BOR', or Bid on Repairs.
This is the same thing as the SOR, just with the cost items removed.
The key here is to give that BOR to the contractors so that they can bid the EXACT scope of work.
In the construction industry we call it "bid leveling" and this is exactly how you compare numbers between contractors accurately and apples to apples.
Make sure to get at LEAST 3 bids. Otherwise, you have no idea what the true pricing of the project is.
Never depend on one contractor and never accept a contractor directly forced on you by a consultant or lender
5. Once you pick the contractor you like best price wise and personnel wise, then the contractor submits their license, insurance, and one-page fillable resume to the bank, alongside their estimate.
The bank then approves that estimate and then you get an appraisal, then you're clear to close.
If you have any additional questions about this, don't hesitate to reach out. This is what I specialize in for almost a decade.
