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What Is an FHA 203(b) Loan and What Are the Requirements?

An FHA 203(b) loan is a mortgage through a lender that’s insured by the Federal Housing Administration (FHA). Buyers can use the loan to refinance or purchase a home with as little as 3.5% down. FHA 203(b) loans can finance single-family or small multifamily homes, provided the borrower lives on the property. To qualify, borrowers must meet standard FHA credit requirements, and the loan amount must be within established limits.

What is an FHA 203(b) loan?

The FHA 203(b) loan program provides affordable 15- and 30-year mortgages to buyers. FHA 203(b) loans allow a down payment of just 3.5%, and the credit qualifications are less stringent than they are for conventional loans. These features can make 203(b) financing appealing for first-time homebuyers and borrowers without a sizable down payment or stellar credit history.

Borrowers can use 203(b) loans to either purchase or refinance a home. The loans can be used for multiple property types, including new or proposed construction:

  • Single-family homes
  • 2- to 4-unit multifamily owner-occupied homes
  • Condominiums
  • Townhouses
  • Manufactured homes

Buyers who take out a 203(b) mortgage borrow directly from FHA-approved lenders, but the FHA guarantees the loan. This means that the government will pay the lender who extended the credit if the borrower defaults on the loan.

FHA 203(b) requirements

FHA 203(b) loans aren’t limited to first-time buyers. However, to be eligible for financing, borrowers and the property they’re purchasing must meet specific FHA 203(b) loan guidelines.

Here’s a look at FHA 203(b) loan requirements:

  • Credit score of 500 or higher (borrowers without credit scores may be eligible if they meet other criteria).
  • 5% down payment if credit score is 580 or above (borrowers with credit scores between 500 and 579 need to put 10% down).
  • Debt-to-income (DTI) ratio of 43% or less, though lenders may accept higher DTI with “significant compensating factors”.
  • Loan amount must be within FHA mortgage limits (limits vary by location and property; current standard mortgage limit for single-family homes is $331,760, or up to $765,600 in high-cost areas).
  • Home must be the borrower’s primary residence.
  • Multifamily properties must be owner-occupied.
  • Home must meet the U.S Department of Housing and Urban Development (HUD) minimum property standards.
  • Borrowers generally can own only one home (lenders may make an exception if the borrower can’t find affordable and suitable rental housing and the loan-to-value ratio is 85% or less).

It’s important to note that 203(b) FHA loan guidelines state that borrowers can use gift funds and grants for their down payment.

The program does come with drawbacks, though. Buyers are required to pay an upfront mortgage insurance premium (MIP) of 1.75% of the loan amount. Additionally, borrowers pay an annual MIP, which is a part of the monthly payment. While borrowers may choose to finance the upfront mortgage insurance into the loan, these fees cut into the buyer’s borrowing power.

FHA 203(b) appraisal requirements

Homes in the 203(b) loan program must be appraised and inspected by FHA-approved appraisers who use a specific FHA process. An FHA appraisal not only determines the home’s value, but it determines if the property meets minimum property standards. These standards ensure that the property is structurally sound and livable and that it serves as adequate collateral for the loan.

Borrowers are responsible for the appraisal cost, which typically ranges from $300 to $700.

Here’s a look at some of the FHA 203(b) appraisal requirements:

  • Home must be a single real estate entity.
  • Home must be accessible to vehicles.
  • Property must be free of conditions that endanger safety or health of occupants.
  • Home must have a safe drinking water supply.
  • Foundation must be in good condition.
  • Utilities must be in working order.

What is an FHA 203(b) with repair escrows?

One feature of FHA 203(b) loans is that buyers can also finance the cost of necessary repairs along with the home purchase. The total cost of repairs must be less than $5,000. Additionally, the lender must establish a repair escrow account to pay for the repairs. The borrower must generally complete the repairs within 90 days of closing.

An FHA 203(b) loan with repair escrow provides borrowers an alternative to 203(k) loans, which are for properties that need extensive repairs.

FHA 203(b) vs. 203(k) loans: What are the differences?

While 203(b) and 203(k) borrowers can use both loans to purchase or refinance a home, the FHA 203(k) loan is specifically for properties in need of significant repairs.

With an FHA 203(k) loan, also called a rehabilitation loan, buyers can finance the purchase of a home along with the cost of rehabbing it in a single loan. Borrowers can also use this loan program to renovate an existing home.

Eligibility requirements and loan guidelines for an FHA 203(k) loan are similar to that of an FHA 203(b) loan. However, borrowers who finance with an FHA 203(k) may need to pay a higher appraisal fee. Also, some lenders may charge an additional origination fee.

Here’s how to qualify for a 203(k) loan from FHA:

  • Total repair cost must be at least $5,000.
  • Total value of property including repairs must be within FHA mortgage limits.

Repairs up to $35,000 qualify for the Limited FHA 203(k) mortgage.

FAQ: FHA loans, rates, down payment, credit

What are some other types of FHA loans or programs?

FHA 203(b) and FHA 203(k) loans are just two types of FHA-insured loans. The FHA offers additional mortgage options and programs, including:

  • Adjustable-rate mortgages (ARMs): Mortgages with introductory fixed-rate periods of 1, 3, 5, 7 or 10 years; interest rates can be adjusted annually after this period.
  • Energy Efficient Mortgages (EEM) program: Financing for energy-saving improvements.
  • Home Equity Conversion Mortgages (HECMs): Reverse mortgages for homeowners 62 and older.
  • Section 203(h): Mortgages for victims of major disasters.
  • Section 247: Mortgages for Hawaiian natives purchasing property on Hawaiian home lands.
  • Section 248: Mortgages for American Indians purchasing Native American land, including reservations and other restricted land.
  • Title 1 home improvement loans: Fixed-rate loans for critical home repairs.

How do I apply for an FHA 203(b) loan?

Borrowers apply for FHA 203(b) loans directly with FHA-approved lenders, such as banks, credit unions and mortgage providers.

Where can I find typical 203(b) loan rates?

Loan rates vary by location. Find current FHA loan interest rates on LendingTree or by checking directly with your lender.

How much do I need for a 203(b) loan down payment?

FHA 203(b) loan guidelines state your down payment can be as low as 3.5% with a credit score of 580 or higher. Borrowers with credit scores between 500 and 579 will need to put down at least 10%.

What are the FHA 203(b) loan credit requirements?

FHA 203(b) loan credit requirements include a minimum credit score of 500 and a total DTI of 43%. Lenders may have additional requirements.

 

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