There are different FHA home loans that are available to borrowers. As a result, it can get quite confusing when you’re looking at your possible loan options. The Federal Housing Administration’s mortgage programs have helped millions of borrowers purchase their first home.
If you’re in the process of applying for an FHA loan it’s important to know your options along with the different types of FHA loans that are available to you as a borrower.
- FHA 203(b) can be used to purchase or refinance a house
- Borrowers must be meet FHA requirements and guidelines to qualify
- Minimum credit score of 500 or higher
- Borrowers must pay upfront mortgage insurance of 1.75%
What is an FHA 203(b) Loan?
An FHA 203(b) is a mortgage that is issued by the Federal Housing Administration in which buyers can use the loan to refinance or purchase a home with only 3.5% down. The loan can be used to finance single-family or small multifamily homes, provided the borrower lives in the property. For borrowers to qualify for this loan they have to meet FHA credit requirements and the loan must fall within the FHA limits.
The FHA 203(b) loan has options for 15, 20, and 30-year mortgages for borrowers. The qualifications for a 203(b) are less strict than they are for a conventional mortgage. The flexibility with this type of loan makes it very appealing for first-time homebuyers or borrowers who don’t have a good credit history.
This type of loan allows borrowers to purchase or refinance a property. The loan can be used for different property types such as:
- New construction
- 2-4 unit multifamily owner-occupied homes
- Manufactured homes
An FHA 203(b) loan is a great option for borrowers who don’t have the necessary funds to put down on a house. This loan is guaranteed by the FHA if a borrower happens to default on it.
What are the Eligibility Requirements for an FHA 203(b) Loan?
It’s worth noting that FHA 203(b) loans aren’t just for first-time homebuyers. They can be used by borrowers who have purchased a home in the past or want to refinance. However, to qualify for financing, the borrower must go through an approved FHA lender and meet the necessary loan guidelines.
Let’s take a look at the FHA 203(b) loan requirements and guidelines:
- The minimum credit score of 500 or higher ( borrowers with lower credit scores can still qualify if they meet other guideline criteria)
- The home must be the buyer’s primary residence
- Borrowers with credit scores between 500 and 579 must put down 10%
- Borrowers with credit scores above 580 must put down 5%
- Multifamily properties must be owner-occupied
- There are not income limitations to qualify
- Borrowers can only own one home unless that lender decides to make exceptions
- The home must meet the U.S Department of Housing and Urban Development (HUD) minimum property standards
- Borrowers have to pay upfront mortgage insurance of 1.75% of the loan amount since the loan is guaranteed by the FHA
- The debt-to-income (DTI) can’t exceed 43%, although lenders may choose to accept higher DTI’s if the borrower comes with a significant down payment
Important Note: Another positive with this program is that borrowers can use gift funds and grants as a source of their down payment. The borrower can finance the mortgage insurance by rolling it into the loan amount but they will impact the buyer’s purchasing power.
FHA 203(b) Appraisal Eligibility Requirements
Houses that are purchased with an FHA 203(b) loan must be appraised and inspected by an FHA-approved appraiser who follows FHA guidelines. The FHA appraiser will determine the value of the home and whether or not the home meets the minimum property standards under FHA guidelines. The standards under the FHA ensure that the property is structurally sound and livable since the property will be used as collateral for the mortgage.
Recommended Reading: How Often Are FHA Loans Denied In Underwriting
Just like with a standard mortgage, there’s an appraisal fee associated with the 203(b) loan which the borrower is responsible for. Generally, the cost of the appraisal will be rolled into the loan.
Let’s take a look at the FHA 203(b) appraisal eligibility requirements:
- Utilities must be under proper working order
- Structure and foundation must be under safe conditions
- The house must have safe drinking water
- Home has to be a single real estate property
- The home must have accessibility for vehicles (garage, safe driveway, etc)
- House must not have any conditions that put the life of the borrower in danger
If the house does not meet any of those conditions, chances are the FHA-approved inspector will not deem the property safe to live in.
What is an FHA 203(b) with Repair Escrows?
A big advantage to an FHA 203(b) loan is that borrowers can finance the cost of repairs into the mortgage. The total cost of the repairs can’t exceed $5,000. With the low maximum, the repairs on the house tend to be mostly cosmetic, although there can be exceptions.
If the borrower has repairs that will need to be done, they will be noted by the inspector. It’s the responsibility of the lender to establish a “repair escrow account” to be used to pay for the necessary repairs. The lender will require the borrower to complete the repairs within 90 days of the loan closing.
The FHA 203(b) loan with repair escrow is a great alternative for borrowers who have properties that need minimal repairs. If the borrower has a property that requires extensive rehab, the 203(k) loan is a better option
Difference Between FHA 203(b) & 203(k)
If you’re applying for an FHA loan, chances are that you will see an FHA 203(k) loan as an option. It’s important to know how this type of loan functions because it may end up being more suitable for your needs and property.
So, what’s the difference between an FHA 203(b) and an FHA 203(k)? The great thing is that borrowers can use both loan programs to purchase or refinance a property. The main difference is that an FHA 203(k) loan is for properties that require significant rehab.
As such, in most situations, you will hear the 203(k) referenced as an “FHA rehabilitation loan”. The FHA 203(k) loan combines that cost of the mortgage along with the cost of the repairs into a single loan. Borrowers can use this loan to not just purchase or refinance their home, but also renovate and upgrade it.
The eligibility requirements for an FHA 203(k) are very similar to that of the FHA 203(k) with a few exceptions below:
- Minimum repair costs of $5,000 for an FHA 203(k)
- Repair costs up to $35,000 will qualify for the FHA 203(k) loan
- The value of the property plus the repairs has to be within the set FHA mortgage limits, which varies by county
Data source: HUD. Borrowers can look up limits for specific markets on HUD.gov’s search tool.
How to apply for an FHA 203(b) loan?
First you have to find an approved FHA approved lender and submit your application. After you apply the lender will run your credit and financial information and see if you qualify.
What are the typical 203(b) interest rates?
The interest rates for 203(b) loans will range depending on your credit score and the amount of your down payment. Generally, interest rates will range between 3%-7%.
How much is the 203(b) loan down payment?
The minimum down payment for an FHA 203(b) loan is 5%.
What are the common expenses with an FHA 203(b) loan?
Some of the common expenses associated with getting an FHA 203(b) loan include: origination fees, underwriting fees, escrow fees, prepaid interest, title and insurance.