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What’s the difference between FHA 203(k) and 203(b) home loans?

house on top of stacks of hundred dollar bills
There are several differences between FHA 203(k) home loans and Standard FHA 203(b) home loans, but the primary difference is that the 203(k) home loan is used for home purchases requiring repairs.

FHA 203(k) home loans are “rehabilitation loans” that are intended to purchase homes which are considered average to below average in condition; hence the need to literally rehabilitate the property.

“The 203(k) renovation loan is perfect for the home buyer who found the perfect home in the perfect area, but the house is in need of repairs,” said Sue Pullen, Regional Vice President at Fairway Independent Mortgage, in an email.

She said that this financing opportunity is especially beneficial for borrowers who seek to finance the cost of repairs rather than spending their savings or running up debt on credit cards for the necessary fixes. Unfortunately for investors, the 203(k) home loan is only for homeowners who will live in the property as their primary residence.

Justin DeJoseph, CEO of Garden State Home Loans Inc., explained to us how important these types of FHA loans have been. He said that the 203(k) home loan has been instrumental in helping towns and cities that have been hit hard by rampant foreclosures across the country. These FHA loans have played a large part in stabilizing property values in rundown areas that have been affected by the Great Recession.

There are actually two types of 203(k) home loans: the Streamlined 203(k) loan and the Standard 203(k) home loan.

“The Streamlined 203(k) loan is the easiest and less costly renovation loan,” said Pullen. “It allows for up to $35,000 in repairs.”

Borrowers can use the Streamlined 203(k) renovation home loan in order to repair kitchens, bathrooms, new appliances, interior and exterior painting, and roof replacement. However, structural repairs are not allowed to be financed by a Streamlined renovation loan. Instead, extensive repairs can be financed by the Standard FHA 203(k) home loan.

Unlike 203(k) home loans, 203(b) home loans do not even involve repairs.

DeJoseph explained that the 203(b) loan is the standard FHA home loan that can be used for purchases, rate and term refinancing, as well as cash out refinancing. In effect, a jack-of-all-trades type of mortgage.

Pullen explained some of its beneficial and attractive attributes.

“It allows for low down payment and borrowers can have not-so-perfect credit,” she said. “Although the FHA does not have minimum credit score requirements, most lenders require at least a 640 minimum credit score.”