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Can someone explain to me in layman terms how 203k loans work?

New Member

Can someone explain to me in layman terms how 203k loans work?

I've read alot about this option, but some of it is very confusing.


Specific questions are:


Are there limitations on which property you can choose? Soes it have to be in need of major repairs or can they be minor? Who has the final say as to whether the property qualifies?


Are the requirements the same as a regular FHA loan? 3.5% down, etc.


Is it harder to get approved for a 203k loan?


How does the funding for the repairs work? Do you have to front the money?

Message 1 of 8
Valued Contributor

Re: Can someone explain to me in layman terms how 203k loans work?

The readers digest version is you get the money up front for the repairs in one loan, that is the point of it.  The process is much more complicated and involved with inspections and such.  The repairs can be very extensive.  As to who's call on whether it's doable or not I would imagine is up to the lender but I'm not realy sure.  I looked into it briefly but it was more involved than I anticipated and went with regular FHA on a better property.  Also be aware that you have to use a regular contractor for the work.  I have friends that are carpenter/plummers etc that would have done the work for cheap but found out that was a no go and would send the cost way up. 

Message 2 of 8
New Visitor

Re: Can someone explain to me in layman terms how 203k loans work?

The 203k loan comes in two forms- The 203k Standard loan, which typically does bigger jobs which involve structural work like room additions, the 203k Streamline has a cap of $35k to do cosmetic remodeling like countertops, cabinets, paint etc..but no structural work.  As far as what properties can be used for the 203k, it's basically any property that's 1-4 units.  It must be your owner occupied property. Condos can only have the interior rehabbed.  The repairs can be minor to major.  Pretty much any propery described above qualifies.  There could be a new kitchen in a property and the 203k loan allows you to rip it out and put in another one.

The underwriting guidelines for the borrower are the same as FHA since the 203k loan is an FHA product.  The appraisal is done different.  There are two values given on the property, an as-is, and an after improved value taking into account the anticipated repairs.  Your final loan amount is driven off of the after improved value.

It is not any harder getting approved for the 203k loan, the offer you write to purchase the property should specify that you are using FHA 203k loan financing.

The way the repairs work, is that home closes escrow in as-is condition with no money fronted.

The lender by this time has a list of repairs that are to be done.  The repair funds are given in draws and phases.

On the 203k Streamline, you get two draws and you work directly with the contractor.

On the 203k Standard, you get up to 5 draws and there's a liason, a HUD Consultant, that works with the contractor, lender and yourself.

The key is to get a contractor who's worked with this loan before and you can find them at and other sites where they've been trained on the nuances of the loan.

ALOT of contractors do not working with this loan due to delays in them getting paid amoung other things, so the 203k experienced contractor is key.

Select a lender that does both the 203k Streamline and Standard loan, than select the contractor obtain estimates and turn them in to the lender and it'll take off from there.

The other answer below wanted to use friends to do the work, this isn't a good idea.  It's better to use 203k experienced contractors who can work within the framework of the loan.  Friends and relatives used to be allowed to do the work, but it caused nothing but problems so that went away.

If it's set up correctly in the beginning and you have the right people working on the 203k loan, it's not that big of a deal.

It's the people who just try to wing it, without the right people who have a bad experience.

I wish you the best. Mod cut!


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Message 3 of 8
New Member

Re: Can someone explain to me in layman terms how 203k loans work?

Thanks for the info! That was beyond helpful!

Message 4 of 8
Regular Contributor

Re: Can someone explain to me in layman terms how 203k loans work?

Out of curiosity...if my husband is an electrician, and we were able to find a home that needed electrical work done, could he be the contractor for the work and receive the money?  Or is the buyer not permitted even if they are a contractor themselves? 

Message 5 of 8
New Member

Re: Can someone explain to me in layman terms how 203k loans work?

From what I've read, its unlikely that he would be approved to be the contractor. If he was approved to be the contractor then he could only be paid for parts, not labor.

Message 6 of 8
New Visitor

Re: Can someone explain to me in layman terms how 203k loans work?

203(k) - How It Is Different.  There are 2 version.  A Streamline and a FULL.  The property or the type of repairs will determine if you will be needing a Full or a Streamline.  Im a huge fan of the loan program.  There typically not difficult if you fully understand the program.


 Streamlined 203K “ELIGIBLE” IMPROVEMENTS (in short non-structural improvements)

  • Repair/replacement of roofs, gutters and downspouts


  • Repair/replacement/upgrade of existing HVAC systems


  • Repair/Replacement/upgrade of plumbing and electrical systems


  • Repair/replacement of existing flooring.


  • Minor remodeling, such a kitchens, bathrooms which does not involve structural repairs


  • Weatherization: including storm windows and doors, insulation, weather stripping, etc.


  • Purchase and installation of appliances, including freestanding ranges, refrigerators, washers/dryers, dishwashers and microwave ovens.


  • Accessibility improvements for persons with disabilities


  • Painting, both exterior and interior


  • Repair/replace/add exterior decks, patios, porches


  • Basement finishing and remodeling which does not involve structural repairs


  • Basement waterproofing


  • Window and door replacements and exterior wall re-siding


  • Septic system and/or well repair or replacement


  • Lead-based paint stabilization or abatement of lead-based paint hazards



  • Major rehabilitation or major remodeling such as the relocation of a load-bearing wall.


  • New construction (including room additions)


  • Repair of structural damage


  • Repairs requiring detailed drawings of architectural exhibits


  • Landscaping or similar site amenity improvements


  • Any repair or improvement requiring a work schedule longer than six (6) months


  • Rehabilitation activities that require more than two (2) payments per specialized contactor


  • Required repairs arising from the appraisal that do not appear on the list of eligible repairs


  • Walkways or driveways
Message 7 of 8
Valued Member

Re: Can someone explain to me in layman terms how 203k loans work?

I did a 203k streamline refi last year through Wells Fargo.   I originally purchased my home in Nov 08 thru Wells @ 6%, had refied in 9/09 which was sold to BofA, then did my 203k @ 5%. back thru Wells agian.   Originally house was a short sale bought for $290k.  When I did the 203k, they came out to appraise and it appraised for $350k.  They do an as-is appraisal and another for when the work is completed in my case a new kitchen.  I was able to remodel kitchen for $35k and roll into new loan. Payment only went up about $100. 

It was pretty painless  Contractor was certified through Wells and they were used to these type of loans.  I submitted a worksheet from the contractor to the bank outlining all the work to be done.  The bank gives you 10% of the 35K up front, and then the balance when the work is finished. 

Message 8 of 8
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