FHA 203(k) Rehab Loans: How Repairs Are Financed

Published by the Modern Lending Solutions editorial team. Last reviewed: October 30, 2026.

Short answer: an FHA 203(k) loan is one FHA-insured mortgage that pays for a home (or refinances it) and for repairs or improvements. The repair money goes into an escrow account and is paid out in draws as the work is done. HUD’s Handbook has two versions: the Standard 203(k), which needs a 203(k) consultant and has a $5,000 minimum repair cost, and the Limited 203(k), for minor, nonstructural work with total rehabilitation costs of no more than $75,000. FHA mortgage insurance applies to the whole base loan. This page covers federal rules only. It is general information, not legal or financial advice.

What the law covers

The National Housing Act lets HUD insure rehabilitation loans, including advances made during the work, for an existing one- to four-unit building used mainly as a home. The loan can pay for the work alone, the work plus a refinance of what you owe on the home, or the work plus the purchase of the home. Rehabilitation means improvement or repair, including energy conservation work and measures to evaluate and reduce lead-based paint hazards (12 U.S.C. 1709(k)(1)-(2), LII, read October 30, 2026). To size the loan, HUD treats the appraised value as no more than the cost of the work plus its estimate of the home’s value before the work (1709(k)(3)(A)).

HUD’s rule adds that the home must have been completed more than one year before the application for insurance, that the loan, with other debt secured by the home, may not exceed the FHA limits based on 110 percent of the estimated value after the work (100 percent of the after-improvement value for a condominium unit that is not a site condominium), and that loans made since December 27, 2005 pay upfront and annual mortgage insurance premiums under 24 CFR 203.284 (eCFR) or 203.285 (24 CFR 203.50(c), (f) and (m), eCFR, text up to date as of October 28, 2026). It also says HUD keeps a list of qualified consultants (203.50(l)).

Standard vs Limited 203(k)

From HUD Handbook 4000.1, section II.A.8.a, which carries the date November 10, 2026, in the Handbook update issued August 12, 2026 (HUD, read October 30, 2026). HUD says it reviews the Limited cap each year with the FHA loan limits, so ask the lender which version and cap apply to your case number.

The Handbook counts a repair as too major for the Limited version if it is expected to take more than nine months, needs more than four draws per contractor, needs a consultant’s work write-up or plans, or keeps you out of the home for more than 30 days in total. Both versions exclude luxury items such as a new swimming pool, a hot tub or a tennis court, and work to support commercial use; the Limited version also excludes structural work, room additions and landscaping.

The consultant

For a Standard 203(k), the lender picks a consultant from HUD’s 203(k) Consultant Roster. The consultant inspects the home and prepares the work write-up, which lists each work item, and the cost estimate, and signs the draw requests. For a Limited 203(k) without a consultant, you give the lender a work plan and bids from one or more contractors, and the lender reviews the contractors’ credentials and whether the bids fall within the usual range for similar work (Handbook II.A.8.a.vi(C) and vii(C)). The consultant fee can be financed within HUD’s consultant fee schedule.

The repair escrow and draws

There is one closing. The lender puts the repair money, the contingency reserve and any mortgage payment reserve into an interest-bearing rehabilitation escrow account and pays it out as work is completed. The lender holds back 10 percent of each draw request until the end (with an exception for finished subcontractor work with lien waivers), must release funds within five business days after a properly signed draw request, and may treat the loan as in default if work does not start within 30 days of the disbursement date, stops for more than 30 days in a row, or is not finished on time (Handbook II.A.8.a.xv to xviii). You can ask for more time; the lender may agree at its discretion if your payments are current.

The contingency reserve

The contingency reserve covers unforeseen costs. For a Standard 203(k), the Handbook requires at least 10 percent of the repair costs for a home 30 years old or older, at least 15 percent if the utilities do not work, and at least 10 percent for a newer home with termite damage; the maximum is 20 percent. You may fund it with your own money. Money left at the end goes back to you if you funded it; if it was financed, a Standard 203(k) may use it for more improvements or apply it to the loan balance, and a Limited 203(k) applies it to the balance.

Example: a Standard 203(k) purchase

This example is only for the math, with example figures, not terms from any lender. It assumes the purchase price equals the as-is value, a home 30 years old or older (10 percent minimum contingency), no mortgage payment reserve, an origination fee financed at the Handbook’s limit, and the 96.5 percent purchase limit in the Handbook’s general rules (II.A.2), which can be lower in some cases.

The Handbook says the LTV used for mortgage insurance is the base loan amount divided by the after-improved value (II.A.8.a.xiii). Here that is over 90 and up to 95 percent, so the annual premium lasts for the mortgage term under HUD’s current table. The rough annual figure uses the starting balance; the actual amount is a little lower. In this example, the escrow holds $44,000 for repairs and the reserve; on a $10,000 draw, $9,000 is paid and $1,000 is held back until the end. See FHA mortgage insurance premiums.

Other ways to pay for repairs

For smaller jobs or a home you already own, see options for home repair costs. For a loan to build a home, see construction loan disclosures.

Questions to ask the lender

• Will this be a Standard or a Limited 203(k), and why?
• Which Handbook version, Limited cap and draw rules apply to my case number?
• What is my base loan amount, and what after-improved value and LTV did you use for mortgage insurance?
• How large is the contingency reserve, and what happens to any money left in it?
• What is the draw limit and holdback, and how long will each release take?
• What happens if the contractor is late or stops work?

Checklist

• Get written bids and check each contractor’s license and references.
• Read the work write-up or work plan and the Rehabilitation Loan Agreement before closing.
• Keep copies of every draw request, lien waiver and inspection.
• Track the completion date and ask for an extension in writing before it passes.
• Check your Loan Estimate and Closing Disclosure for the upfront and monthly premium.

You can submit a complaint at consumerfinance.gov/complaint.

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Sources

1. LII: 12 U.S.C. 1709, Insurance of mortgages
2. eCFR: 24 CFR 203.50, Eligibility of rehabilitation loans, current text up to date as of October 28, 2026
3. HUD Handbook 4000.1, FHA Single Family Housing Policy Handbook (Update 18, issued August 12, 2026), PDF
4. eCFR: 24 CFR 203.284, Calculation of up-front and annual MIP on or after July 1, 1991, current text up to date as of October 28, 2026
5. CFPB: Submit a complaint

Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.