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Purchase fixer-upper rental property using an FHA 203k Rehab Loan

The FHA 203K Renovations Mortgage Loan only requires a credit score of 580 and 3.5% down payment.
multifamily-fixer-upper
multifamily-fixer-upper

Buying fixer-upper rental property with less than perfect credit is made easier with an FHA mortgage-backed rehab loan.

Home flipping t.v. shows make renovating real estate look glamorous and lucrative. But if you have bad credit, it’s generally difficult to purchase fixer-upper rental property.

Borrowers with bad credit can fare better by purchasing a fixer-upper rental property purchased through the FHA 203k Renovation Mortgage Loan Program.

What is an FHA 203k Rehab Loan

The FHA 203k rehab loan program is a specialized loan backed by the Federal Housing Administration (FHA) that allows borrowers to finance both the purchase (or refinance) of a home and the cost of its rehabilitation or renovation into a single mortgage.

But there’s a catch. You must live in the rental property.

It’s not a terrible requirement when buying rental property with bad credit and definitely not a deal breaker. Plus, it’s only a one-year occupancy requirement for FHA 203k rehab loans.

203k Rehab Loan Program Details

FHA 203k loans aren’t designed for investors, but there’s a hack

While FHA 203k mortgage loans aren’t designed for investors, if you purchase a two-to-four family unit, live in one unit (for a minimum of 12 months), you are essentially an investor. And, as an owner occupant, you can take advantage of the 203K Renovation loan for distressed properties.

How 203k Renovation Loans work

An FHA 203k Renovation Mortgage Loan lets you borrow money for a mortgage and home renovations at the same, lumping the funds together as one mortgage loan.

  • Loan amounts are set by FHA County loan limits. For example, the maximum 203k loan amount in a designated low-cost area would be $566,425 for a 4-unit property and $679,550 for a 4-unit property in a high-cost area.
  • 203k loans are guaranteed by the FHA which makes them easier to get approved, especially when you have bad credit.
  • You borrow the purchase amount plus the necessary improvements amount.
  • You can borrow enough to finance 110 percent of the home’s projected value after improvement. Appraisers will review your plans and take the future value of your home into account.

Benefits of the 203k Renovation Loan

FHA 203k loans allow you to purchase distressed multi-unit property

Borrowers can purchase a duplex, triplex or 4-unit apartment, fix and upgrade the property, then rent out the units. Even though you are required to live in one unit, there’s still room to make money from the remaining units.

Renovation Flexibility

It can be used for a wide range of projects, from minor repairs and upgrades to major renovations and even structural additions.

On-Site Landlord

Living in your rental property can be an advantage when you’re starting out in real estate investing. You get a chance to experience making major repairs, upgrading kitchens and bathrooms, dealing with renters, creating leases, screening tenants, collecting rent money and maintaining property before you venture into larger apartment units.

Requirements for 203k Renovation Loans

The 203k loan combines the purchase and repair funds, but you still need a down payment and money for the closing costs.


203k loans are guaranteed by the FHA which means lenders assume less risk. As a result, borrowers find it easier to get approved with imperfect credit while still getting a low interest rate.

  • Credit score: You’ll need a credit score of at least 500 to qualify for an FHA 203(k) loan, though some lenders may have a higher minimum.
  • Down payment: The minimum down payment for a 203k loan is 3.5% if your credit score is 580 or higher. You’ll have to put down 10% if your credit score is from 500 to 579. Down payment assistance may be available through a state or county down payment assistance program, and monetary gifts from friends and family are permitted.
  • Closing costs: These costs cover various fees and expenses associated with processing and finalizing the loan, including origination fees, appraisal fees, title search, and more.
  • Max loan amount: FHA loan limits vary depending on where you live but are generally capped at $498,257 in low-cost counties and $1,149,825 in high-cost counties for single-family residences.
  • Requires a licensed contractor to complete ALL the work. It’s best to work with a General Contractor who has experience with FHA 203k loans.

Problems with the FHA 203k Renovations Program

Tons of paperwork is required for the FHA 203k Renovations Mortgage Program. In addition to the paperwork, ALL renovation work must be done by licensed contractor that sees the work through from the beginning to end. Unfortunately, you or your trusted handy man are not allowed to do the work.

How to find an FHA Approved Lender

Find an FHA-Approved Lender at HUD. Applications must be submitted through an FHA approved lender, input your state, county or city to find a lender near you. You can also ask your bank or mortgage broker about the FHA 203k Mortgage Loan Program.

How to find Multi-Unit Properties

You’ve got to put in work to find multi-unit properties. The best action to take is call realtors in the area you want to purchase. Realtors often have resources you can’t find by searching on your own. Other ways to find multi-unit properties is real estate sites like:

These real estate sites have apps that can send property listings and alerts directly to your cell phone.

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