In one line: A government-backed mortgage that finances the purchase and the repairs of a fixer-upper together.
An FHA 203(k) loan lends against the home's value after the planned repairs, so the purchase price and the renovation budget are one loan with one closing. The Limited 203(k) covers up to $75,000 of non-structural work; the Standard covers structural work with a consultant overseeing draws.
It is the usual answer for a home that will not pass an ordinary lender's condition rules, the ones listing agents mark cash preferred. The trade-offs are FHA mortgage insurance for the life of the loan under 10% down, contractor bids up front, and a slower close.
Fannie Mae's HomeStyle Renovation loan is the conventional cousin, with higher limits and no lifetime mortgage insurance for borrowers who qualify. The fixer-upper guide sets both against the 70% rule.
A worked example
Purchase $280,000 plus $60,000 of repairs on one 203(k) loan, appraised at an after-repair value of $390,000. The buyer closes once, the contractor is paid from escrowed draws, and mortgage insurance runs with the loan.
Questions people ask
What can a 203(k) pay for?
Roof, HVAC, plumbing, electrical, kitchens, baths, flooring, accessibility work and, on the Standard version, structural repairs and additions. Not luxury items such as a pool; a renovation loan from Fannie Mae's HomeStyle program can.
Do I need a contractor before I apply?
Yes. Bids from a licensed contractor set the repair budget the loan is underwritten on, and the work has to be finished within six months of closing.