FHA's 203(k) program (also called a streamline k) combines a new home loan with a home improvement loan. So you can snag a bargain home and fix it up right away. The program can also be used for refinance mortgages with home improvements.

Eligible properties

Your fixer-upper must be a single family home, duplex, triplex, or fourplex that has been completed for at least one year. FHA 203(k) mortgages can also be used for individual units in condominium projects that have been approved by FHA. The home must comply with local zoning ordinances. Any new construction must be attached to the existing structure (no guesthouses or saunas). Homes that have been or will be demolished are eligible as long as some of the existing foundation system remains in place.

In addition to typical home renovations, 203(k) loans can be used to convert a one-family home to a duplex, triplex, or four-plex, so you could add rental units to the home you buy. Or, you could convert a multi-family property to a big single family home.

Eligible improvements

Luxury items and improvements are not eligible -- so no swimming pools, outdoor kitchens, or fantasy garages for your Bimmers or Ferraris. You can use the 203(k) program to pay for painting, room additions, decks and other items. Any needed health, safety and energy conservation improvements must be addressed before you get to the fun stuff.

Loan amount

FHA 203(k) loans are subject to FHA mortgage limits in your area. The maximum mortgage amount is 96.5 percent of the lesser of

• The as-is value or the purchase price of the property before rehabilitation, whichever is less, plus the estimated cost of rehabilitation
• 110 percent of the after-improved value of the property

How do you buy a fixer-upper with an FHA loan?

• Find a lender approved to do 203(k) loans. Shop with several to get a great mortgage rate. Get your mortgage application approved and get a pre-approval letter.
• Find a property. Make sure that your offer contains language indicating that you need a 203(k) loan in order to complete the purchase.
• Find a contractor to write an estimate of work needed and materials required. You aren't allowed to do the work yourself unless you are a professional builder.
• Get your home and improvements appraised. There may be two appraisals required, since the value of the unimproved and improved property will need to be determined.
• Your loan funds. When the loan closes, the seller is paid and the remaining funds are held in escrow for the contractor.The lender (or its agent) releases escrowed funds as work is completed.
• Complete the repairs.

You now own a fixed up house that may already be worth more than you paid. In exchange for a little extra effort, you could make a superb investment and get a home customized to your liking.