203b Loans from the Federal Housing Administration
The 203b loan is the most common type of home loan insured by the FHA. FHA 203b loans are designed to finance properties between 1-4 units. While these loans are insured by the Federal Housing Administration, they are issued by non-government entities, such as banks, credit unions, savings and loan associations, or private lenders.
FHA 203b Loan Basics and Borrower Qualifications
FHA 203b loans are a fantastic option for many borrowers— in particular, those who are buying their first home, or those who may not have the greatest credit. In order to qualify for a 203b loan, a borrower must:
Have a FICO credit score of at least 500, or, if the borrower doesn’t have a credit score, other financial statements that can determine creditworthiness
Have between 3.5% and 10% of the loan amount to use as a down payment, or, be able to get a down payment gift from a qualified source (family, friends, employers, etc.)
Have a debt-to-income ratio of no more than 43%, though lenders may be able to make exceptions for borrowers with great credit or little overall debt
203b Loan Uses and Alternatives
203b loans can be used for both purchasing new home and refinancing a new one. However, 203b loans cannot be used for cash-out refinancing beyond the $500 limit set by the FHA. If you’re looking to tap into your home equity for cash, you’d probably be better served by an FHA cash out refinance or a conventional cash-out refinance, depending on your individual needs.
Standard 203b loans also cannot be used for home repair or renovation funding. However, for borrowers who need a small amount of money for home repair, a variation of the 203b loan, the 203b loan with repair escrows, may offer the ideal solution. In contrast, if you need a more substantial amount of funds for your home renovation project, the FHA 203k loan could be a better fit for your needs.