Have you found a great home within your budget that needs some work? Perhaps it is poorly insulated or has outdated appliances. Or maybe it needs major repairs like a new roof or heating system. How will you be able to afford both your mortgage payments and the necessary home improvement costs?

Luckily, the Federal Housing Administration (FHA) offers an option that combines a mortgage with home improvement financing. With an FHA 203(k) mortgage, you make one convenient monthly payment that includes both your mortgage and home improvement financing. 203(k) loans give buyers these distinct advantages:

• An opportunity to buy an affordable home and bring it up to standards
• Elimination of duplicate appraisals and title searches required with separate loans
• Lower closing costs than if the buyer took two separate loans.

Understanding 203(k) Loans

203(k) mortgage loans are available in all parts of the country, and can be used for homes in rural, suburban or urban neighborhoods. Homes must be at least one year old, and your home improvement costs must come to at least $5,000. You can expect interest rates to be about the same as other current home loans. If you are interested in getting a 203(k) loan, you’ll need to take these preliminary steps:

• Start by contacting a lender who offers 203(k) financing. The Department of Housing and Urban Development’s website offers a list of approved 203(k) mortgage lenders.
• You’ll also need to hire a consultant, approved by HUD to document and prioritize the work that needs to be done to your home. Repairs necessary for health and safety come first, followed by those that increase the value of the home. You can find a consultant on the HUD website as well.
• Finally, you’ll need to hire an appraiser, who will estimate what the value of your home will be after your repairs are done.

During the application process, 203(k) mortgage lenders will consider credit and work history to be sure applicants can handle the monthly payments. You’ll be responsible for successfully renovating your home, once the loan is approved.

Determining Your 203(k) Loan Amount

HUD has an interesting way of determining the exact amount of a 203(k) loan, which ends up being the lesser of the following:

• The future value of the home, after the work is completed, plus 10 percent
• The sum of the home’s current value plus the cost of the work to be done, and up to six months mortgage payments.