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

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 rehabilitation process can be costly and unpredictable. Sometimes problems come up buyers were not prepared for. While other traditional loans are expensive with high interest rates if they’re approved at all, 203(k) loans offer affordable rates with a long-term loan that covers both the purchase price and rehabilitation costs. The loan is also insured to protect mortgage lenders. Mortgage limits can prevent you from being approved under other programs.

“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. So if you’re buying distressed homes in areas like Detroit to flip them, you cannot use these mortgage loans.

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.

What Are The Types of 203(k), and Is One Loan Program Better than The Other?

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 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.

What Are The Credit Qualifications for A 203(k) Loan?

A 203(k) loan has looser standards in some ways. A traditional appraisal would not cover a distressed property. Even if the appraisal assigned it a certain value, a lender could reject the appraisal. PMI companies would also be hesitant or refuse to cover a home in that state.

Borrowers still have to meet credit standards. These are generally for single-family homes, and they do have to be owner occupied. The base credit score requirement is 640, but mortgage companies can set their own credit score requirements. Even though the loan is insured, lenders still take some degree of risk if the loan defaults.

Lenders have to make sure borrowers can afford the monthly payments with the purchase price and money for repairs wrapped in. A loan officer gathers the initial documentation, but an underwriter makes the final call. Keep in mind, not all lenders offer this kind of loan.

“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.”