Home renovations can be daunting, but financing them doesn’t need to be. Homebuyers considering a fixer-upper and homeowners thinking about doing major rehab work might want to consider an FHA 203K loan.

Often called rehab or renovation loans

, 203K loans differ from traditional mortgage loans. Buyers who want to purchase a home in need of repair usually have to secure a loan to buy the property, get additional financing to complete the renovation and then get a permanent mortgage to pay off the interim loans. 203K loans, however, are made based on the after-repair value and include an escrow account, in which the money is dispersed in draws as the necessary renovations are being completed.

Renovation loans can be used in three ways: to purchase an existing home (and the land attached to it) and renovate it; to pay off existing debt on a current residence and renovate it; or to purchase an existing property and move it to a new piece of land. The types of improvements allowed on 203K loans are extensive — painting, room additions, decks, bathroom and kitchen remodels, and even going green. Luxury items and improvements are generally not eligible.

 

Homebuyers need to work closely with their REALTOR®  as well as a contractor to get a detailed statement about the extent and general cost of the rehab work and the expected market value of the property after the completion of the work. After finding a HUD-approved lender — not all banks administer these loans — and inspections and appraisals, the work can begin. For more information, go to www.hud.gov .