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FHA203b

What Is an FHA 203b Loan?


May 21, 2020 by Matt Frankel, CFP

An FHA 203b loan can be a great way for Americans to become homeowners, even if they wouldn't qualify for a conventional mortgage in many cases. With that in mind, here's an overview of what an FHA 203b loan is, the qualification standards, and the other important information homebuyers should know before deciding on a mortgage.

What is an FHA 203b loan?

An FHA 203b loan, commonly referred to simply as an "FHA loan" or "FHA mortgage," is a type of mortgage product that is made by a lender and is insured by the Federal Housing Administration, or FHA.

FHA 203b loans are designed to make homeownership accessible to borrowers, even if they don't have a ton of cash to put down or don't have excellent credit. They are intended for owner-occupied homes, meaning that FHA 203b loans cannot be obtained for vacation homes or investment properties. However, buyers can purchase a property with as many as four separate housing units as long as they're planning to live in one of them and can rent out the other units to tenants.

The FHA 203b mortgage insurance program is the main feature of the loan that makes it unique. This insures the loan balance against the risk of default for any borrower who qualifies for an FHA 203b mortgage. There's no income limitation to qualify, and the buyer doesn't need to be a first-time homebuyer. We'll get into the specific requirements for a 203b loan later in the discussion.

FHA 203b vs. FHA 203k loans

Before we go any further, it's worth clarifying a popular misconception. There are several types of FHA home loans, but the two most common are the 203b and the 203k loans, and they are often confused with one another.

An FHA 203k loan is a type of FHA mortgage loan designed to help borrowers acquire homes that need significant repairs or other modifications. It can be very difficult for homebuyers to obtain financing for both a home and renovation projects all in one loan product, especially without top-notch credit scores or 20% of the purchase price for a down payment. So a 203k loan is designed to allow buyers to obtain a single loan that will cover the purchase and rehabilitation costs of a home. For this reason, FHA 203k loans are often referred to as FHA rehabilitation loans or some variation of that phrase.

FHA 203b loans are often confused with 203k loans, even by experienced real estate agents and other professionals. Just keep in mind that the FHA 203b loan is the "standard" FHA mortgage that is used to buy a one- to four-unit owner-occupied property with a small down payment and flexible credit standards. And the 203b loan is intended for properties that are move-in ready without needing extensive repairs or renovations.

A 203k loan has similar qualification requirements as the standard FHA loan, but it is specifically designed for homes that need work.

FHA 203b loan qualifications

FHA 203b loans are known for their relatively easy qualification standards, especially in regards to credit requirements and down payments. So here's what you need to know about qualifying for this type of mortgage:

  • Credit qualifications -- Most mortgage lenders use your FICO® Score to determine your ability to qualify for a mortgage, and FHA mortgages have easier credit qualification standards than conventional mortgages. If you want an FHA loan with the minimum down payment, you'll need a 580 FICO® Score. However, if you have 10% to put down, you can get a 203b loan with a FICO® Score as low as 500.
  • Down payment -- FHA 203b mortgage insurance allows the lender to finance as much as 96.5% of a home's value. This means that the loans require a 3.5% down payment, which is based on the home's selling price, not its appraised value. Your down payment is allowed to come from a gift, and you are allowed to ask the seller to cover some of your closing costs to help minimize out-of-pocket expenses.
  • Debt and income -- FHA lenders generally want to see a debt-to-income, or DTI ratio of 43% or lower. This means that if you make $5,000 per month pre-tax, your total monthly obligations including your new mortgage payment need to be less than 43% of this amount, or $2,150. However, it's worth nothing that debt-to-income ratios of more than 43% may be allowed by certain lenders in some cases. And unlike many other programs designed to help make homebuying more affordable, there's no upper income limit to qualify for an FHA 203b loan. (There are loan limits, however, which we'll discuss later on.)
  • Employment -- To get an FHA 203b mortgage, you'll need to have a steady employment history. This is generally defined as two years of continuous employment in the same field (although not necessarily with the same employer).
  • Property -- In order to qualify for a 203b loan, a property needs to meet the standards of the Department of Housing and Urban Development, or HUD, for safety, security, and soundness. This is verified by an FHA-approved appraiser. If a property doesn't qualify for a 203b loan, it could still potentially qualify for a 203k rehab loan, as discussed above.

Applying for an FHA 203b loan

Most major lenders in the United States offer FHA 203b mortgage loans, so you can probably apply for one with your favorite mortgage lender.

One word of caution -- even if you love your bank, it's still a smart idea to apply to several different mortgage lenders. While the general approval standards are the same among FHA lenders, the interest rate you get offered can vary between institutions. You might be surprised how much of a difference a seemingly small interest rate change can make over the life of a 30-year mortgage, so there's no good reason not to apply to a few different lenders before deciding.

How much does an FHA 203b loan cost?

We already mentioned that an FHA 203b loan has a down payment requirement of at least 3.5%. However, that's not the only expense associated with obtaining a loan.

An FHA loan has a variety of closing costs the borrower could face. You can read our thorough discussion of FHA closing costs, but the short list includes mortgage insurance premiums, prepaid taxes and insurance, origination fees, lender fees, appraisal fees, and more. In all, the average homebuyer who uses an FHA loan can expect closing costs to fall somewhere in the range of 3% to 4% of the sale price, although higher or lower totals are certainly possible.

While this may sound like a lot of fees (and it is), there are a couple of things to know. First, the FHA lending rules allow borrowers to finance some of their closing costs (such as the FHA mortgage insurance premium) into the loan, which can help minimize the out-of-pocket cost. And second, FHA borrowers are allowed to ask sellers to pay for closing costs, up to 6% of the home's sale price. So while an FHA loan isn't without fees, there are ways to get out of paying them, at least at the closing table.

FHA 203b loan limits

In order for a mortgage to qualify for FHA Section 203b mortgage insurance, it needs to fall under a certain limit. The FHA loan limits depend on two factors -- the geographic location of the property (high-cost areas get higher limits) and the number of housing units in the property.

In a nutshell, FHA loans are designed to make homeownership affordable, not to enable buyers to buy very expensive homes with little money down. The FHA 203b loan limits reflect this principle. Here's a chart of the FHA loan limits for 2020:

Number of Housing Units Base FHA Loan Limit High-Cost FHA Loan Limit Alaska, Hawaii, Guam, U.S. Virgin Islands FHA Loan Limit
1 $331,760 $765,600 $1,148,400
2 $424,800 $980,325 $1,470,475
3 $513,450 $1,184,925 $1,777,375
4 $638,100 $1,472,550 $2,208,825

Data source: HUD. Borrowers can look up limits for specific markets on HUD.gov's search tool.

The Millionacres bottom line

FHA 203b loans can be an excellent way for Americans without large sums of cash or who have less-than-ideal credit histories to become homeowners. Like any lending product, there are advantages and disadvantages (such as the higher-than-average mortgage insurance cost), so be sure to explore your options before making a decision.

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