FHA 203(b) Loan: What It Is And How It Differs From An FHA 203(k) Loan

Buying a home can be an incredibly rewarding experience. Searching for the perfect abode online, seeing one you like in person, offering and closing on a contract. It is quite the journey. It can also be stressful, especially when it comes to saving for a down payment.

Fear not, though! There are some ways you might be able to get some help with a down payment on a mortgage for your new home. One of those is utilizing an  FHA 203(b) loan.

What Is An FHA 203(b) Loan?

FHA 203(b) loans are mortgages insured by the Federal Housing Administration (FHA) specifically geared toward home buyers and mortgage refinancers who are interested in securing a loan without a large down payment.

Essentially, an FHA 203(b) loan is just the standard FHA home loan from the FHA’s mortgage loan programs. Borrowers can purchase or refinance a single-family home or small multi-unit property with an FHA 203(b) loan as long as they meet eligibility requirements, plan to use the property as their primary residence and can make a down payment of at least 3.5%. This minimum down payment is far lower than other types of loans, like a conventional home mortgage.

FHA 203(b) loans are popular options for first-time home buyers because they don't often have the savings yet for a large down payment amount. Once homebuyers have bought and sold multiple homes, they’re more likely to have accumulated more equity or financial wealth to put more down on the next home they purchase.

Another great feature of FHA 203(b) loans is that they can be used to purchase or refinance. This means if you’re buying a home for the first time or looking to refinance your current mortgage for better terms, this type of loan is a good option to consider.

As a government-backed loan, an FHA 203(b) loan brings peace of mind to homeowners knowing that their loan is backed by the FHA, a part of the United States Department of Urban Housing and Development (HUD).

There are other types of FHA loans as well, so make sure you understand the different options available before making a decision on what type of mortgage you want to use to purchase or refinance your house.

FHA 203(b) Vs. FHA 203(k) Loan

Speaking of other FHA loans, it’s important to understand the difference between an FHA 203(b) loan and an FHA 203(k) loan. Let’s start with what an FHA 203(k) loan is.

An FHA 203(k) loan helps prospective buyers purchase a home that is in need of significant repairs or modifications. You may hear your real estate agent refer to these types of homes as “fixer uppers.”

To summarize, an FHA 203(b) loan helps home buyers to purchase turnkey homes that require little to no improvements to be move-in ready. On the flip side, FHA 203(k) loans help borrowers finance homes that need at least $5,000 in necessary repairs or modifications.

FHA 203(b) Loan Eligibility Requirements

FHA 203(b) loans are not just for first-time home buyers but also real estate investors who plan to live in the property as well as current homeowners who are planning to sell their home to buy a new primary residence.

To qualify for an FHA 203(b) loan, you’ll need to meet specific guidelines set by the FHA. Here is an in depth look at the various requirements so you can get a sense of whether or not you might qualify for an FHA 203(b) loan.

• Credit score: While the FHA requires a minimum credit score of 500, most lenders require a higher credit score to obtain this type of loan. Rocket Mortgage requires a minimum credit score of 580.
• Down payment: The minimum down payment for an FHA 203(b) home loan is 3.5% of the cost of the home. Depending on your credit score, you may be required to put down more.
• Debt-to-income ratio (DTI): Lenders look at your debt-to-income ratio to see what other financial obligations you are responsible for. The less debt you have compared to your income, the more likely you’ll be able to pay your mortgage each month. To qualify for an FHA 203(b) home loan, your DTI must be 43% or less.
• Loan amount: To qualify for an FHA 203(b) loan, your loan must be at or below the established FHA loan limits. These limits vary based on your location. As of 2022, the maximum FHA loan limit is $420,680 in most areas of the country and $970,800 in high cost of living areas, like Alaska and Hawaii.
• Property type: Primary residences that can be purchased with an FHA 203(b) loan must have 1 to 4 separate units. This includes single family homes and multifamily buildings, such as duplexes, triplexes and quadplexes. Some condos can also be financed with an FHA loan, depending on the restrictions placed on the condominiums by their governing association. .

Mortgage insurance premium: You have the option to pay the upfront mortgage insurance premium (MIP) of 1.75% of the loan amount at closing, or you can finance mortgage insurance premiums into the loan. Keep in mind you’ll also be responsible for paying an annual premium.

FHA 203(b) Appraisal Requirements

FHA appraisals – like other home appraisals – determine the value of a home. FHA appraisals are a little different though, as they require an FHA-approved appraiser to evaluate the property to ensure it meets the FHA’s minimum property standards. Essentially, the minimum property standards require that the home is structurally sound with no health or safety hazards.

The Bottom Line

FHA 203(b) loans can be a great way to get a new home without putting down a ton of cash. If the home requires a lot of work, an FHA 203(k) might be a better option. But if it’s a turnkey home, the FHA 203(b) loan might be your best bet. Ready to get moving? Start the mortgage process today!