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If you have your heart set on buying a fixer-upper, a 203(k) loan can help. Repair work requires energy and money, and it can be difficult to secure a loan to cover both the value of the home and the cost of repairs — especially if the home is currently uninhabitable. With a 203(k) loan, the Federal Housing Administration (FHA) insures loans for the purchase and substantial rehab of homes. It is also possible to take out an FHA 203(k) loan for home repairs only, which could prove helpful given how costly this work can be.

Read on for more information about FHA 203(k) loans and the FHA 203(k) process, as well as your other home improvement loan options.

What Is an FHA 203(k) Home Loan?

Section 203(k) insurance lets buyers finance both the purchase of a house and its rehabilitation costs through a single long-term, fixed-rate or adjustable-rate loan. Before the availability of FHA 203(k) loans, borrowers often had to secure multiple loans to obtain both a home mortgage and a home improvement loan.

The loans are provided through mortgage lenders approved by the U.S. Department of Housing and Urban Development (HUD) and insured by the FHA. This government loan helps to rejuvenate neighborhoods and expand homeownership opportunities. Some buyers use FHA loans to purchase and rehabilitate a HUD Home, a property that is in the government’s possession. These loans are also popular with first-time homebuyers thanks to lenient credit requirements and a low minimum down payment.

Because 203(k) FHA loans are backed by the federal government, you may be able to secure one even if you don’t have stellar credit. Rates are generally competitive but may not be the best, because a home with major flaws is a risk to the lender.

The FHA 203(k) process also requires more coordination, paperwork, and work on behalf of the lender, which can drive the interest rate up slightly. Lenders also may charge a supplemental origination fee, fees to cover the review of the rehabilitation plan, and a higher appraisal fee.

Additionally, the loan will require an upfront mortgage insurance payment of 1.75% of the total loan amount (it can be wrapped into the financing) and then a monthly mortgage insurance premium.

How an FHA 203(k) Loan Works

As mentioned above, you can take out a 15- or 30-year fixed-rate mortgage or an adjustable rate mortgage through an FHA-approved lender. The amount for which you’re approved will depend on how much your home is expected to be worth after all of the renovations are completed, as well as the cost of the work.

Additionally, the amount you’re approved for will depend on which type of FHA 203(k) loan you get — either the limited (also called streamline) or the standard. (Note that both of these options also have a 203(k) refinance option for current homeowners.)

Types of FHA 203(k) Loans

Streamlined or Limited 203(k) Loan

The limited 203(k) FHA loan allows you to finance up to $35,000 into your mortgage for any repairs or home improvements, including emergency home repairs such as replacing a roof or flooring. There is no minimum repair amount. However, the streamlined 203(k) loan does not cover major structural work.

Standard 203(k) Loan

If you’re buying a real fixer-upper and looking to tackle larger jobs or major structural repairs, you’ll likely want to go for the standard 203(k) loan. A minimum repair cost of $5,000 is required, and you must use a 203(k) consultant, a HUD-certified professional who will oversee the project and make sure FHA standards are met.

What Can FHA 203(k) Loans Be Used For?

Purchase and Repairs

For a standard FHA 203(k) loan, other than the cost of acquiring a property, rehabilitation may range from minor repairs (though exceeding $5,000 in worth) to virtual reconstruction. If a home needs a new bathroom or new siding, for example, the loan will include the projected cost of those renovations in addition to the value of the existing home.

You could do either a remodel or a renovation with the funds, the former of which is making updates to an existing room or structure, while the latter is more extensive and can include changing the function or partially the structure of a home. An FHA 203(k) loan, however, will not cover “luxury” upgrades like a pool, tennis court, or gazebo.

If you’re buying a condo, 203(k) loans are generally only issued for interior improvements. However, you can use a 203(k) loan to convert a property into a two- to four-unit dwelling.

Project estimates done by the lender or the FHA will determine your loan amount. The loan process is paperwork-heavy. Working with contractors who are familiar with the way the program works and will not underbid will be important.

Contractors will also need to be efficient: The work must begin within 30 days of closing and be finished within six months.

Temporary Housing

If the home is indeed unlivable, the standard 203(k) loan can include a provision to provide you with up to six months of temporary housing costs or existing mortgage payments.

Who Is Eligible for an FHA 203(k) Loan?

Individuals and nonprofit organizations looking for a home mortgage loan can use an FHA 203(k) loan, but investors usually cannot. (The only way to use a 203(k) loan to finance an investment property is to buy a property with multiple units and live in one of the units.)

FHA 203(k) Loan Qualification Requirements

Most of the eligibility guidelines for regular FHA loans apply to 203(k) loans. They include a minimum credit score of 580 and at least a 3.5% down payment. Applicants with a score as low as 500 will typically need to put 10% down. Those with credit scores of less than 500 are not eligible for FHA-insured loans.

Your debt-to-income ratio typically can’t exceed 43%. Additionally, you must be able to qualify for the costs of the renovations and the purchase price.

Recommended: How to Qualify for a Mortgage

How to Apply for a 203(k) Loan

To apply for any FHA loan, you have to use an approved lender, a list of which you can find on HUD.gov. It’s a good idea to get multiple quotes.

Once you have a lender, they will assign you a 203(k) consultant who will help you to plan the work that needs to be done on the property you’ve selected and determine how much it will cost. To do so, the consultant will perform a home inspection to identify necessary repairs and improvements, including any health or safety issues.

After that, you will need to find a contractor to write out an estimate for the cost of the labor and materials. Once the lender approves that estimate, they will appraise your home. Your loan can then close and work on your home can begin.

Pros and Cons of 203(k) Rehab Loans

Before you move forward with 203(k) rehab loans, it’s important to understand the benefits as well as the downsides. Here are the major pros and cons to consider:

How Much Can You Borrow with an FHA 203(k) Loan?

The maximum amount you can borrow with a standard FHA 203(k) loan is 110% of the home’s proposed future value or the purchase price plus your anticipated renovation costs, whichever is less. The total value of the home must still fall within the FHA’s mortgage limits for your area, however. (As noted above, the most you can borrow with a limited FHA 203(k) loan is $35,000.

203(k) Loans vs Conventional Home Rehab Loans

As you consider whether an FHA 203(k) loan may be your best bet from among the many types of mortgage loans, you may be wondering how it compares to a conventional home rehab loan. Both can provide financing to cover the cost of renovating, but there are some key differences to keep in mind — namely, the credit score and down payment requirements as well as what types of improvements can be financed.

Alternatives to 203(k) Rehab Loans

The FHA 203(k) provides the most comprehensive solution for buyers who need a loan for both a home and substantial repairs. However, if you need a loan only for home improvements, there are other options to consider.

Depending on the improvements you have planned, your timeline, and your personal financial situation, one of the following alternatives could be a better fit.

Other Government-Backed Loans

Limited FHA 203(k) Loan: In addition to the standard FHA 203(k) program, there is a limited FHA 203(k) loan of up to $35,000, as mentioned above. Homebuyers and homeowners can use the funding to repair or upgrade a home.

FHA Title 1 Loans: There also are FHA Title 1 loans for improvements that “substantially protect or improve the basic livability or utility of the property.” The fixed-rate loans may be used in tandem with a 203(k) rehabilitation mortgage. The owner of a single-family home can apply to borrow up to $25,000 with a secured Title 1 loan.

Fannie Mae’s HomeStyle® Renovation Mortgage: With Fannie Mae’s HomeStyle® Renovation Mortgage, homebuyers and homeowners can combine their home purchase or refinance with renovation funding in a single mortgage. There’s also a Freddie Mac renovation mortgage, but standard credit score guidelines apply. Need more details? Our complete guide to government home loans can help.

Cash-Out Refinance

If you have an existing mortgage and equity in the home, and want to take out a loan for home improvements, cash-out refinancing from a private lender may be worth looking into.

You usually must have at least 20% equity in your home to be eligible, meaning a maximum 80% loan-to-value (LTV) ratio of the home’s current value. (To calculate LTV, divide your mortgage balance by the home’s appraised value.)

A cash-out refi could also be an opportunity to improve your mortgage interest rate and change the length of the loan. To examine whether this approach is right for you, check out your cash-out refinancing rate.

PACE Loan

For green improvements to your home, such as installing solar panels or an energy-efficient heating system, you might be eligible for a PACE loan .

The nonprofit organization PACENation promotes property-assessed clean energy (or PACE) financing for homeowners and commercial property owners, to be repaid over a period of up to 30 years.

Home Improvement Loan

A home improvement loan is an unsecured personal loan — meaning the house isn’t used as collateral to secure the loan. Approval is based on personal financial factors that will vary from lender to lender.

Lenders offer a wide range of loan sizes, so you can invest in minor updates or major renovations. A home improvement loan of $5,000 to $100,000 may be an option worth considering to turn your home into a haven.

Home Equity Line of Credit

If you need a loan only for repairs but don’t have great credit or wish to fund more than $35,000 in repairs, a HELOC may provide a lower rate. Be aware that if you can’t make payments on the borrowed funding, which is secured by your home, the lender can seize your home.

Recommended: Guide to Buying, Selling, and Updating Your Home

The Takeaway

If you have your eye on a fixer-upper that you just know can be polished into a jewel, an FHA 203(k) loan could be the ticket. However, other loan options may make more sense to other homebuyers and homeowners.

Stop wondering if homeownership is within reach and how to get there. SoFi’s Mortgage Loan Officers can help you navigate the application process from start to finish.

FAQ

Is it hard to qualify for an FHA 203(k) loan?

An FHA 203(k) loan is easier to qualify for than other types of mortgage because you can have a down payment of as little as 3.5% and a credit score of 580. With a higher down payment, a credit score of 500-580 could be adequate.

Who qualifies for FHA 203(k)?

To qualify for an FHA 203(k) loan, you’ll need a credit score of at least 500, a down payment of 3.5% (10% if your credit score is below 580), and you will need to use the property you are buying and renovating as your primary residence. You’ll also need to use a professional contractor to make improvements. (This is not a loan for DIY renovators.)

How much can you borrow on a 203(k) loan?

The most you can borrow with a standard FHA 203(k) loan is the lower of either: 110% of the home’s proposed future value or the purchase price plus expected renovation cost. A limited FHA 203(k) loan has a ceiling of $35,000.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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If you are searching for a place to park your cash for a short period of time and earn a good interest rate, certificates of deposit (CDs) can be an option to consider.

On the plus side, a CD may earn more than a standard savings account, helping your money grow faster.

A traditional CD, however, has a downside: Your cash will be tied up until the CD matures, and that could be several months to several years. If you need your money before that maturity date, you will likely pay a penalty for early withdrawal.

A no penalty CD is similar to a traditional CD, except that there is no fee charged for making a withdrawal before the CD matures. However, no penalty CDs may not be easy to find. What’s more, they may have a lower interest rate than you’ll find for traditional CDs.

Here’s what you need to know to decide if a no penalty CD is the right option for you and how they stack up to other high-interest savings options.

No Penalty CDs Explained

A no penalty CD is a type of deposit account that’s structured like a traditional certificate of deposit (CD) in that money is placed into the account for a set period of time — usually around a year.

During that period, interest accrues, often at a higher rate than a standard savings account.

That rate is locked in until the end of the CD term, also known as its maturity date.

Unlike traditional CDs, there is no fee or loss of earned interest if the money is withdrawn before the account matures.

Funds usually need to be kept in the account for at least a week before they can be withdrawn. But as long as that short milestone is met, a no penalty CD is a very flexible option.

No Penalty CDs versus Traditional CDs

Opening one or more CDs can be an effective way to house your savings. It’s one of several ways to earn more interest than you might in a traditional savings account.

But before deciding which CD to choose, it helps to understand the intricacies involved in each type.

With a traditional CD, money can’t be withdrawn from that account without incurring a penalty fee.

Early withdrawal penalties for a CD vary, depending on the individual financial institution, but the penalty typically involves losing a certain number of days or months’ worth of interest.

The length of time varies by each bank or credit union, but depending on how early you withdraw your funds from a CD, you could possibly lose some of the principal or initial deposit.

For example, a bank may charge a CD early withdrawal penalty as 120 days (or four months) of interest payments.

If the CD has only been open for three months, you’d not only lose the account’s accumulated interest but an additional month of daily interest would also be deducted before the cash could be withdrawn.

Generally, the farther away you are from the CD’s maturity date, the higher the penalty will be.

That’s why long-term CDs aren’t typically recommended to house short-term emergency savings. When that surprise expense pops up, it could end up costing money to access the funds.

Of course, every bank has different terms and conditions. Before opening any account, it’s important to understand all of the details to avoid getting caught off guard with unexpected charges.

Recommended: Different Ways to Earn More Interest

Pros and Cons of a No Penalty CD

All savings accounts come with both risks and benefits. A no-penalty CD may not be right for everyone, so let’s dive into some of the pros and cons.

Like all CDs, no penalty CDs come with a fixed interest rate until it matures. No matter what happens to rates within the market, that original APY is guaranteed.

A high-yield savings account, on the other hand, can drop the rate at any time based on market conditions.

Another benefit of a no-penalty CD is that cash continues to be kept liquid.

Whether it’s intended for an emergency fund, a down payment on a house, or to pay for a wedding, this type of CD can be a useful tool that balances both flexibility and setting money aside for a financial goal with a specific timeline.

On the flip side, this type of account may offer a lower interest rate compared to traditional CDs.

While no penalty CDs may pay a higher APY than a traditional bank savings account, these CDs may not pay as high an APY as some online savings accounts.

Also keep in mind that although a no-penalty CD does allow you to access funds, it’s usually a one-time event.

Banks typically require all of the funds in the no-penalty CD to be withdrawn that one time and will then close the account, which means the rate lock is out the window.

Another limitation of a no-penalty CD (as well as a traditional CD) is that once you invest, you can’t add to it. You can, however, open another no penalty or traditional CD.

Finding a No Penalty CD

No penalty CDs aren’t as common as their traditional counterparts. But they can be found through several online banks, making it convenient to open, fund, and manage the account.

Some local banks and credit unions may also offer this type of CD.

Shopping for a no-penalty CD is the same as evaluating any other financial product.

In addition to comparing interest rates, it’s also a good idea to look for account minimums, as well as the minimum time after depositing your money before withdrawals are allowed (typically around a week, but this can vary).

Some banks also offer tiered interest rates for no deposit CDs, with higher rates offered for higher deposit amounts.

Whatever no penalty CD you are considering, it’s smart to read the fine print.

Some banks may advertise a “no penalty CD” but are really offering something quite different, such as a 12-month CD that only allows you to withdraw your money penalty-free in the event of an emergency, such as a job loss.

Alternative Options

A no-penalty CD can be a great way to earn higher interest on your savings than you would get in a standard savings account, yet still, maintain flexibility.

It’s not the only option, however. Here are some others to consider.

High-yield checking account

An interest-bearing checking account helps earn some extra cash on the money used on a day-to-day basis.

It’s one of the most flexible options because there are no transaction limits and both a checkbook and debit card can be linked to the account.

However, some banks charge a monthly account fee or require a certain minimum balance in order to qualify for this extra incentive. And interest rates on these accounts tend to be lower than other short-term savings options.

High-yield savings account

High-yield savings accounts, which are offered by many banks and credit unions, typically come with a higher interest rate than a checking account or traditional savings account.

It’s easy to transfer money between accounts, but withdrawals may be limited to six per month and there may be fees for dropping below a minimum balance.

High-yield savings accounts are also offered by online banks. Because these banks only operate online (and, as a result, tend to have lower operating costs), online savings accounts often offer higher interest rates than high-yield savings options at brick-and-mortar banks.

Online savings accounts typically allow you to deposit checks and move money back and forth between accounts but may have limits on how many withdrawals you can make per month.

Recommended: Different Types of Savings Accounts

Money market account

A money market account (MMA) is a low-risk investment account (deposits may be placed in government bonds, CDs, or commercial paper) that tends to offer higher interest rates than a traditional savings account.

Depending on what’s happening in the market overall, an MMA may be in line with that of an online-only bank account.

Money market accounts often allow you to write checks and may also come with a debit card, but there may be limitations on how often you can write a check or withdraw your money.

These accounts may also require a high minimum balance to avoid monthly fees, especially for higher yield tiers.

Cash management account

A cash management account (CMA) is a cash account offered by a financial institution other than a bank or credit union.

CMAs are designed to merge the services and features of checking, savings, and investment accounts, all into one offering.

Generally, when you put money into a CMA, it earns money (often through low-risk investing that is done automatically), while you can also access it for your daily spending.

This allows CMAs to function similarly to a traditional checking account, yet pay interest that is often higher than most savings accounts.

Some brokerage firms require a large minimum deposit to open a CMA, or may charge monthly fees for anyone under that minimum.

For people who are interested in streamlining their accounts, as well as saving for a short-term goal, a CMA can be a good option.

The Takeaway

If you’re looking for a higher return on your savings than you’re getting at the bank, but still want some liquidity, a no-penalty CD could be the right choice for your financial goals.

These CDs may offer lower interest rates, however, than you would get with a traditional CD. So it’s a good idea to shop around for rates to see which bank is offering the best deal.

Other ways to help your savings grow, yet still keep it liquid, include a high-yield checking or savings account, an online savings account, a money market account, and a cash management account.

Looking to grow your savings, but still, have access to it at any time? You may want to consider opening a SoFi Checking and Savings Account. You spend and save in one convenient place, while also earning a competitive APY to help you meet your savings goals. Plus, there are no account fees to worry about.

SoFi Checking and Savings: The smarter way to bank.

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SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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