How can a 203(k) home loan help you make a home greener?

HUD's 203(k) loan helps homeowners buy and rehab properties in disrepair.
HUD's 203(k) loan helps homeowners buy and rehab properties in disrepair.

There are always homes on the market that are sitting in disrepair, and unfortunately very few brave buyers are willing to purchase them. It's not because buyers don't see their potential; it's because the houses need significant renovations that require large amounts of cash that most homebuyers don't have. And buying a house that needs major renovations can be complicated. Sometimes, a bank won't even give you a loan for an "inhabitable" house. If you're even able to secure financing, it's usually a temporary mortgage for the home. You have to get another loan to complete the necessary renovations, and then secure a permanent mortgage once all renovations are complete.

Despite the process you have to go through, renovating and greening a home has many advantages for everyone. Although eco-friendly upgrades may be costly upfront, they provide long-term cost savings through reduced energy and water bills. Greening a home also adds value and marketability if you decide to sell in the future. Not to mention, you're doing your part to improve your community and preserve the environment by conserving water and energy.


The U.S. Department of Housing and Urban Development (HUD) understands the benefits of green renovations and the frustrating process of trying to buy a home in disrepair. HUD also recognizes how important it is to neighborhoods and communities to sell these empty houses and get them updated and occupied. So in response, it introduced the 203(k) loan, which facilitates the process of buying and rehabilitating properties by providing loans based on the post-renovation value of the homes [source: HUD]. The 203(k) loan also includes an escrow account for renovations, so the costs are actually built in to the monthly mortgage payments.

But the 203(k) doesn't apply to just home purchases; it applies to existing homes, as well. So if you've been considering renovating your home to make it more environmentally friendly, but haven't quite figured out how to pay for it, a 203(k) loan could be something you'd benefit from. Read on to learn more about what improvements you can make with a 203(k) loan.

Green improvements like insulation not only qualify under the 203(k) loan, they're required in some cases.
Green improvements like insulation not only qualify under the 203(k) loan, they're required in some cases.
© Nichols

You don't have to buy a home to take advantage of a 203(k) loan. You can use the loan to refinance but there are stipulations. You must have paid with cash, and it can't be more than six months since you made the purchase [source: HUD]. HUD allows you a lot of freedom in the purchases that qualify, as well as the improvements you want to make. In fact, the loan would even cover purchasing a home and moving it from one location to another. You can add additions to the home using 203(k) loan money as well, as long as they are connected to the original structure [source: HUD].

The only thing 203(k) loans to do not allow are "luxury" items. HUD defines luxury items as excessive or recreational improvements, or items that aren't permanent fixtures, like swimming pools, satellite dishes, tennis courts, flat-screen TVs and barbecue pits [source: HUD]. Other than that, the door is open to a wide variety of improvements. Your 203(k) loan will cover new paint, siding and even the addition of a deck.

Green improvements not only qualify, they are required in some cases. All of your new construction (i.e. additions to the home) and structural work completed using a 203(k) loan must comply with HUD's Cost Effective Energy Conservation Standards. For all other renovations, several green improvements are required, including improving the thermal efficiency of your home by the addition or replacement of weather stripping, caulking or sealing all openings to the outside of the home, insulating all wall and ceiling areas that were exposed due to your renovations, and ventilating any attic and crawl space areas [source: HUD]. Heating and cooling systems must also be replaced or upgraded according to HUD's standards. All of these required improvements will pay for themselves over time through reduced energy bills. Finally, smoke detectors must be present in every room of the house. Other than that, you have freedom to green your home in any other way you see fit.

Speak with your contractor about the improvements you could include to make the home more green. Some easy options are buying ENERGY STAR appliances, adding energy-efficient windows and adding low-flow plumbing fixtures. All of these green improvements can be financed through your 203(k) loan. If your energy-efficient improvements cost more than the mortgage amount you qualify for, you may be eligible for a $4,000 to $8,000 increase to your mortgage to cover the energy-efficient costs using an Energy Efficient Mortgage [source: HUD]. You may even qualify to add an extra 20 percent to your mortgage amount if you are adding a solar energy system to your home [source: HUD]. Sounds pretty good, doesn't it?

See how much you could borrow and if you qualify for this loan next.

There are two different types of 203(k) loans -- the traditional loan and the streamline version. If you're not making any structural changes to the dwelling and your renovations are under $35,000, the streamline version is for you. A streamline 203(k) is the easiest version to secure. It usually pays 50 percent up front and makes the final deposit upon completion of the renovations. The streamline loan often doesn't require a final inspection phase of the loan [source: Blackwell].

If you're making any structural improvements, or your total improvements cost more than $35,000, the traditional 203(k) loan is your only option. For this loan, inspections are required, and you must agree on a payment schedule with your lender that complements your renovation schedule. Usually, money is paid out of an escrow account as each phase is completed and an inspector has verified the work is finished [source: HUD]. Although some lenders may allow you to set up a contingency account just in case you exceed your renovation estimate, you can borrow only 110 percent of the as-is value of the house, leaving you just 10 percent of the as-is value to complete your renovations [source: Fontinelle]. You must also put 3.5 percent of the offer price down on the loan at closing.

As you begin the process of securing a 203(k) loan and purchasing a property, remember that you're getting a really sweet deal. The government is allowing you to purchase a home in need of repair and helping make the renovation process easier and more cost-effective for you. With this in mind, you'll be able to deal with the small frustrations the loan securing process can cause. First, it might be more difficult to find a lender using a 203(k) loan. Even though HUD provides access to the loan, you still have to finance through a bank, which will determine your interest rate. Once you find a lender who will work with you, keep in mind the closing process for a 203(k) loan is longer than a typical loan. Account for anywhere from 60 to 90 days for closing compared to the typical 30- to 45-day closing period [source: Fontinelle].

Once you finally close on your new home, be ready to start renovations immediately. All renovations using 203(k) loan money must be completed within six months of your closing date [source: Fontinelle]. This shouldn't be a problem though, because a full renovation proposal is required during the application process, so you should already have all of your renovation decisions made at closing.

Once your renovations are completed, a HUD-approved inspector will certify that all work is finalized according to your approved plan (or any approved change orders). This final approval from the inspector will release your remaining escrow funds. If you're lucky enough to have come in under budget, the remaining escrow funds will be paid toward your mortgage principal. All you have to do after your final draw is released is enjoy your newly renovated home, and of course pay your monthly mortgage payments and reduced utility bills made possible by your green renovations.

Related Articles


  • Blackwell, Jonathan. "FHA 203K - Your Path to Green Renovation." (Jan. 28, 2011)
  • Fontinelle, Amy. "An introduction to the FHA 203(k) loan." MSN Real Estate. Oct. 8, 2010. (Jan. 28, 2011)
  • Fontinelle, Amy. "Applying For An FHA 203(k) Loan." Yahoo Finance. Aug. 26, 2010. (Jan. 28, 2011)
  • Hevron, JR. "3 Ways to Get Paid for Cost-Saving, Green Home Upgrades." Oct. 22, 2010. (Jan. 28, 2011)
  • U.S. Department of Housing and Urban Development (HUD). "Rehab a Home w/HUD's 203(k)." June 29, 2010. (Jan. 28, 2011)
  • U.S. Department of Housing and Urban Development (HUD). "Valuation Analysis for Single Family One- to Four-Unit Dwellings (Appendix B: Special Programs)." July 1, 1999. (Jan. 28, 2011)