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Understanding FHA 203(b) Loans And How They Differ From FHA 203(k) Loans

Sarah Sharkey3-minute read

June 20, 2022


Saving for a big down payment is a significant hurdle for many would-be home buyers. But it doesn’t have to be! Home buyers who pursue an FHA 203(b) loan can take advantage of a low down payment requirement to make homeownership a reality.

What Is An FHA 203(b) Loan?

The FHA 203(b) loan is a popular mortgage option for first-time home buyers. But this mortgage product can be used by most buyers looking for a primary residence.

The primary draw is the low down payment requirement. You might be able to close on a home with as little as 3.5% down! As one type of FHA loan, FHA 203(b) loans are backed by the Federal Housing Administration.

Although this is a government-backed loan, you’ll borrow the funds directly with an FHA-approved lender. These lenders can offer 15- or 30-year mortgages to buyers that come with relatively low interest rates and less strict credit requirements.

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

An FHA 203(k) loan is used to assist home buyers that are purchasing a home that is in need of significant repairs or modifications. An FHA 203(b) loan, on the other hand, is primarily used for move-in ready homes.

A home would need at least $5,000 in essential repairs to qualify for an FHA 203(k) loan. So, those looking for a fixer-upper that could be a diamond in the rough should consider FHA 203(k) loans. But keep in mind that FHA 203(k) loans will only allow you to finance up to $35,000 in repairs. Rocket Mortgage® does not offer FHA 203(k) loans.

If you want to avoid making major renovations to a home before moving in, an FHA 203(b) loan is one type of loan to consider.

Who Is Eligible For An FHA 203(b)?

If you are considering an FHA 203(b) home loan, here’s a look at eligibility:

  • First-time home buyers. As a first-time buyer, that low down payment requirement is especially helpful.
  • Real-estate investors. Investors can purchase a property with this loan, but they’ll have to live on the property.
  • Current homeowners. If you’ve already gone through the home buying process once, the FHA 203(b) loan is still a good option if you are planning to sell your home and buy a new one.

If you aren’t planning to live in the property, this is not the right type of loan for you, as it must be used as a primary residence.

FHA 203(b) Requirements

To qualify for an FHA 203(b) loan, you’ll need to meet specific guidelines set by the Federal Housing Administration. Here’s are the checkpoints to meet if you want to qualify.

  • 5% down payment. In addition to standard FHA qualifications, a minimum down payment of 3.5% will need to be saved up.
  • 580 credit score. While the FHA requires a minimum 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.
  • 43% or less DTI. Lenders look at your debt-to-income ratio to see what other financial obligations you have on your plate.
  • Property must be within FHA loan limits. Loan limits vary based on your location. But as of 2022, the maximum FHA loan limit is $970,800 in high cost of living areas, while the limit is $420,680 in more affordable areas of the country.
  • 1- to 4-unit structures only. The property can only have up to four units. Single-family homes, duplexes, triplexes, and quadplexes are examples of what you can purchase with an FHA 203(b) loan.
  • Mortgage insurance. You have the option to pay the upfront mortgage insurance premium 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.

The requirements to obtain an FHA 203(b) loan are less stringent than a conventional loan. That’s because the government promises to cover the lender’s losses if you default on the loan.

But if you are unable to meet these requirements, work on improving your financial picture before starting your home search. For example, try boosting your credit score or paying off debts to lower your DTI.

FHA 203(b) Appraisal Requirements

As with all home loans, the home will need to be appraised by an FHA-approved appraiser.

Of course, an FHA appraisal will determine the value of the home. But additionally, FHA-approved appraisers have a specific process to ensure that the home meets the FHA’s minimum property standards.

The minimum property standards require that the home is structurally sound with no health or safety hazards.

The Bottom Line

An FHA 203(b) loan is an attractive option for potential home buyers. If you are ready to dive into the home buying process, start by getting preapproved for a mortgage today.

See What You Qualify For

Sarah Sharkey

Sarah Sharkey is a personal finance writer that enjoys helping readers learn more about their finances. She has an MS in Business Management from the University of Florida. You can connect with her on LinkedIn or Instagram @adventurousadulting.