Summary
- The FHA 203(b) loan, also called the Basic Home Mortgage loan, makes it easier to get a mortgage by requiring lower credit scores and less of a down payment.
- If your credit score is at least 580, the minimum down payment is 3.5%.
- The most common and easiest FHA loan to get is the 203(b) loan.
- Due to the higher risk that comes with FHA loans, you will have to pay MIPs for the life of your loan.
Most people think of the FHA 203(b) mortgage loan when they hear about FHA (Federal Housing Administration) loans. It is the most common kind of FHA loan, and it is also called the Basic Home Mortgage Loan. It’s easy to see why, since the minimum credit score and down payment are lower.
This kind of loan was made for people who want to buy their first home but don’t have great credit or enough money for a big down payment. Conventional loans often have these more strict requirements. But of course, anyone can get an FHA loan as long as they follow the rules.
Do you want to get an FHA 203(b) loan? This article will help you decide if you should get an FHA 203(b) loan.
What’s the deal with an FHA 203b loan?
The main goal of FHA loans is to make it easier for Americans to get home loans. The FHA protects approved lenders from the risk of borrowers not paying back their loans by giving them insurance. This means that because the FHA provides a safety net, lenders don’t mind giving loans to people with less than perfect credit.
With this, lenders can finance up to 96.5% of the home’s value, which means a 3.5% down payment is all that’s needed.
Also, FHA loans can only be used to insure single-family homes with up to four units. If you want to buy a second home, a vacation home, a commercial building, or an investment property, you should go in the opposite direction. The FHA says that you have to live in the home for at least a year.
If you are caught doing occupancy fraud, you could spend up to 30 years in prison and pay a $1 million fine.
FHA 203b Loan Qualifications
Even though getting an FHA loan is much easier, there are still some things you need to do to get approved.
Qualifications
If you want a mortgage that is easier to get and you plan to use the property as your main home, look no further. Here are the requirements you need to meet to get an FHA loan:
- Credit score: You need a credit score of 580 to be eligible for the 3.5% down payment. If your credit score is between 500 and 579, you need at least a 10% down payment.
- Your debt-to-income ratio (DTI) shouldn’t be more than 43%.
- Proof of a steady job and income: To make sure you can pay back your loan, you must show proof of employment and income for the past two years.
- Mortgage insurance: Mortgage insurance premiums (MIP) are a way for lenders to make sure they don’t lose money if a borrower doesn’t pay back their loan. The upfront mortgage insurance premium (UFMIP) is 1.75% of the base loan amount. You will also have to keep paying MIPs for the whole length of your loan. But if you put down at least 10%, your MIP will go down after 11 years. Another way of removing your MIP is refinancing into a conventional loan once your home reaches 20% equity.
Occupancy Rule
As was already said, the FHA loan can only be used for a main home. To make sure this rule is followed, the FHA has rules about where people can live.
- You have to move in within 60 days of the closing date.
- You have to live there for most of at least one year.
These rules were made so that businesses and investors couldn’t get loans from the government.
FHA Loan 203b Vs. 203k Loan
Another type of FHA loan is the 203(k) loan or the rehabilitation mortgage insurance. This loan is made for houses that need heavy repair. Check out the table below to find out which type suits you better.
Once you’ve settled which loan type to go for, the next step is finding an FHA-approved lender in your area and finding out how much you can qualify for.
Should You Get an FHA 203b Loan?
The FHA 203(b) loan is a good choice if you want to buy your main home with a loan that has less strict requirements. It has a lower minimum credit score and requires less of a down payment than most conventional mortgages do.
But, of course, not everyone can do it. If you want to buy a home for something other than your primary residence, like a commercial property, a vacation home, or a second home, this loan is not for you.
The MIPs are another problem with an FHA loan. Of course, you can also get a regular loan. But in situations like these, it’s best to do the math to figure out which type of loan is best for you. You should also take into account your DTI and credit score.
But even with all the bad things, the FHA 203(b) loan is a great choice for people who want to buy a home.
FAQs
What is an Annual FHA 203(b) Mortgage Insurance Premium?
With an FHA loan, you have to pay two insurances: the upfront fee (UFMIP) and the mortgage insurance premium (MIP).
For regular FHA loans, the UFMIP is 1.75 percent of the loan amount and is paid up front, as the name suggests. You can either pay it as part of the closing costs or add it to the loan, which will make your monthly mortgage payment higher.
On the other hand, the MIP is between 0.45% and 1.05% of your loan amount per year, depending on how long your loan is and how much it is. Then, it is split into 12 months. You will have to keep paying this until your loan is paid off. One exception is if you put down 10% or more, in which case your MIP will go away after 11 years.
What Kinds of Terms Are There for FHA Section 203(b) Loans?
FHA loans come with fixed interest rates and terms of 15 or 30 years. You can pay off your FHA loan early without being charged a fee, but you usually can’t make it last longer than 30 years.