FHA Construction Loans Explained

FHA construction loans, from what is popularly known as the 203(k) loan program, are a type of government mortgage financing exclusively designed to fund the costs of a property's rehabilitation and repair. These properties can be one-to-four unit homes or condominium units.

Who Can Apply for the Loan

Whether you are a home buyer who wants to rehabilitate a property before occupancy or a homeowner contemplating repairs to your home, you can submit your application for the loan. Nonprofit organizations whose interests are in line with property rehabilitation and improvements are also qualified entities who may benefit from the loan. However, investors are not allowed to participate in the program.

Qualified Properties

The FHA construction loans can only be used to finance the restoration of the following types of homes:

single and up to four-unit residences--A homeowner may transform his one-unit dwelling into two, three or four units. Beyond this limitation is not acceptable. He must also make sure that the additional newly constructed building adjoins the old property.

condominium unit--Condominium owners can use the loan to renovate only the interior parts of the unit. Construction done outside the unit premises cannot be covered by the loan. Setting up fireproof materials in the attic to protect the unit from fire is an exception; the loan can be used for the cost of this.


Eligible Improvements

The funds allocated from the FHA construction loans must be spent only on specific kinds of property rehabilitation and repairs. Some of the renovation projects that the loan will finance are:

  • modification or remodeling of the building's framework/structure
  • discarding of health-threatening materials, like lead-based paints
  • plumbing system's repair or renovation
  • replacement and installation of roofs, gutters, downspouts and flooring 
  • upgrade of kitchen or bathroom utilities
  • installation of energy-saving systems


Amount of Loan

The FHA construction loans require at least a minimum of $5,000 improvement costs for the unit. Minor repairs or remodeling are not eligible for this program. Home buyers are given the privilege to request an additional loan of up to $35,000 using the "Streamline (K)" Limited Repair Program to overhaul the home unit before occupying the residence.

Loan-Related Fees

Though the funding for the rehabilitation of your home is made available, you must recognize that it is also associated with several loan charges. Some of the service fees that the FHA allows and that you need to settle after your loan is approved are for the following:

Independent consultant--Though not required, HUD recommends that the borrower hire one. The expertise of an independent consultant can help the loan get approved quickly.

Inspection--Representatives from the HUD Field Office conduct inspections of the rehabilitation.


Appraisal--A lender sends a team of appraisers to evaluate the property. This fee is usually included in the closing costs.

Supplemental origination--A fee collected in addition to the origination fee on the sum amount of the mortgage.

HUD-certified fee consultant--A HUD representative visits and reviews the unit to see that the program criteria are complied with. This is done before the appraisal procedure.

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