HUD's guidelines do allow the buyer to make the repairs themselves on an FHA 203(k) loan. Here is the verbiage directly from HUD's site located here http://www.hud.gov/offices/hsg/sfh/203k/faqs203k.cfm
"Is a contractor required to do the work? No. However, if the borrower wants to do any work or be the general contractor, they must be qualified to do the work, and do it in a timely and workmanlike manner. It is very important that the work be done in a time frame that will assure the completion of the work that will be agreed upon in the Rehabilitation Loan Agreement (signed at closing). A borrower doing their own work can only be paid for the cost of the materials. Monies saved can be allocated to cost overruns or additional improvements."
So, the 203(k) program does allow the buyer (homeowner at this point) to do the work themselves, but HUD allows the lender making the loan to have overlays that can be more restrictive. So, while HUD does allow the buyer (homeowner at this point) to do the repairs themselves, most lenders will not allow this. So, this decision is made by the lender. Check with the lender to find out about their overlays (add'l restrictions).
Contractor Directory for the FHA 203(k) Program