How to Use a 203k Loan for REI 

Real Estate Investing5 min read

Your complete guide to a 203k loan.

JP Moses
JP Moses

Alright dear investor… we’re gonna talk about money. 

Ooooh, ahhh. 😉

Well, specifically finding an undervalued property to scoop up for your next rehab project. 

So the question is: How do you go about financing an REI deal like that? 

Good thing for you is that you don’t have to do the research. We’re explaining it all right here. You’re welcome!

You already read the title of this blog post, so here we go: The solution is a 203k loan designed for renovating a property. You can use this mortgage loan to finance a property plus any rehab work, all under one loan.  

Let’s learn more about it, fix & flippers!

What Is a 203k Loan for Real Estate Investing? 

Many, if not most, lenders reject applications for financing distressed homes. But as investors, that’s our bread and butter. 

Enter the  203k loan — a government-funded FHA reno loan. It’s ideal when you’re searching for low interest rates and a long-term payment plan. It does require that the reno must be done within 6 months, but that seems pretty reasonable to us.

You could even say that a 203k loan “encourages” you to invest in a fixer-upper.  

What Are the Types of 203k Loans for REI? 

So there are 2 choices:

  • The standard version (or full 203k loan) allows you to renovate the house as you want. You can remodel the entire property, because there’s no limit on the amount you can borrow. There is a catch, though: The total amount of the mortgage cannot exceed the FHA borrowing limits for your target market/state. 
  • The limited version (or streamlined 203k loan) comes with a cap limit of $35,000. That’s the maximum amount you can borrow to rehab the property. 

Which option is better? 

  • Go with the standard version when you need to tackle structural damage or full-scale renovations. 
  • Apply for a streamlined 203k loan if the house needs only minor upgrades (cosmetic makeover, new appliances, repairing the roof, etc.). You can qualify as long as the house doesn’t require structural repairs, and you’ll get a max of $35k, which will be paid directly to your general contractor. 

How Does a 203k Loan for REI Work? 

For a 203k loan to work, you need a detailed budget. Also, hire a contractor before loan approval. That will help you with the approval process. 

A 203k consultant will approve the design, map, and everything in between. Your mortgage company will appoint a consultant. 

Self-Sufficient Investment Properties

The FHA has a qualifying trick for multifamily houses: The house must be self-sufficient. That means the rental income from a 3-4 unit property covers the property’s expenses, including the housing payment. 


The FHA wants to make sure the property produces enough rent to be a smart investment and, of course, that you can make the mortgage payments and other financial obligations.

We’re gonna put some numbers to this as an example and calculate a monthly mortgage payment… 

Let’s say your payment will be $2,750 and your expected rental income is $4,000. Multiply your expected rental income by 0.75.

That’s $2,800.

Now, subtract the mortgage amount from the net rental income = $1,250 

The property is self-sufficient because the net income exceeds the mortgage payment.


How to Secure a 203k Loan for REI? 

You can secure a 203k from mortgage lenders and credit unions. Pretty straightforward.

Some brokers are not familiar with 203k loans for real estate investments, so you might need to specifically ask for it. 

This is important: 203k loans are for a primary residence. So how could you get around this, as an investor? You could live in the property for a year, then move out and rent out the house or flip it as an investment deal. (Don’t worry, we have another creative solution for this in the Pros below.)

SUPER important; lying on a mortgage application can be a felony, so just don’t do it.

Lastly, you can only have one active FHA loan at a time. But we think that’s actually good incentive to get the project done in a reasonable time frame.

Pros & Cons of 203k Loans for REI

Small down payment of 3.5%. Ideal for renovating multifamily units. You can invest in a multifamily property and use one unit as your primary residence. Live in the house for 12 months, and then you can rent out the entire property. The interest rates on FHA 203k mortgages are similar to those on Fannie Mae loans. That means you can secure the loan at a favorable rate. 
Loan approval takes time. You won’t be able to close the deal within 20–30 days. At best, you can estimate 45–60 days. You need a good credit score. You cannot pay yourself for any DIY work you do in the house. The payment is only given to a general contractor who is not the borrower. You will pay a monthly mortgage insurance premium. You can only buy as a primary residence. 

How Is a 203k Loan for REI Different from a Construction Loan? 

You can build a house with a construction loan. A 203k loan works only for renovation purposes. You can also refinance an existing structure with a 203k mortgage. 

The construction loan is similar to 203k in the sense that the work is pre-approved and payments are made strictly to contractors. Both FHA loans have low interest rates. 

You cannot refinance a house using an FHA construction loan

Conclusion: How to Use a 203k Loan for REI 

Ok then, an FHA 203k loan is an ideal option to build equity in multifamily properties. You can secure the loan with a minimum down payment, you just need to  find a property that can generate positive cash flow after the renovations. 

A 203k loan is a smart option to avoid high-interest  or hard money loans.  The FHA 203k gives you more peace of mind and long-term payment options.

You can qualify if you are investing in a primary residence with a good credit score.

But you definitely have play by the government’s rules.


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