If you want FHA financing, you likely hear a multitude of letters being thrown around. One such name is the FHA 203(b). This is the standard FHA loan, just with a fancier name. Keep reading to learn more about this important loan that has helped millions of borrowers become homeowners.
The FHA 203(b) Loan Defined
The FHA 203(b) loan is your standard FHA loan. Any borrower that can meet the FHA guidelines can apply for this loan. It’s synonymous with the term ‘FHA loan.’ According to HUD, the goal of the 203(b) loan is to provide mortgage insurance for borrowers buying/refinancing a primary residence. The bank processing the application funds the loan and HUD provides the insurance.
What this means is that you meet the flexible FHA guidelines and the bank will fund your loan. In exchange for the ‘risky’ loan, HUD will provide the lender with insurance that guarantees payments should you default on the loan.
The mortgage insurance HUD provides is your responsibility, though. It’s a part of your mortgage payment. The lender will pay the insurance for you on an annual basis, but charge you 1/12th of the amount with your monthly mortgage payment.
Qualifying for the FHA 203(b) Loan
Qualifying for the FHA 203(b) loan is much easier than qualifying for many other loan programs. You must meet the following requirements, at a minimum:
- Minimum 580 credit score (some lenders require a higher score)
- Maximum 31% housing ratio
- Maximum 43% back-end ratio
- Stable employment (some lenders require 2-years)
- Stable income
- No previously defaulted federal loans
These are the FHA guidelines. Because the FHA doesn’t fund the loans, though, you may find lenders that add overlays. These are additional guidelines you must meet in order to qualify with a particular lender. If you find that you don’t meet one lender’s guidelines, but meet the FHA guidelines, you can shop around with different lenders to find one with fewer restrictions.
The Down Payment Requirement
The FHA 203(b) loan only requires borrowers to put down 3.5% of the purchase price of the home. That means you can borrow as much as 96.5% of the purchase price. The even better news is that the down payment money doesn’t have to come from your own funds. If you can secure gift funds in the amount necessary to put down on the home, the FHA will allow it.
Here’s the catch. You must be able to prove that the funds are a gift. You cannot just accept cash from a relative or friend and use it as your own money. You have to go through the proper steps to make sure to prove the money was a gift. This means:
- Having the donor write a gift letter stating the amount of the gift, the reason, and that it is not a loan
- Have proof of the funds with the donor’s last two bank statements
- Provide any proof of sale of any assets if the funds are not seasoned in the donor’s account for at least two months
- Provide proof of receipt of the funds and deposit in the borrower’s designated bank account
Basically, the bank and the FHA need to know that the funds are not a loan. If they are a loan, the lender would have to include the payment in your debt ratio to see if you still qualify for the loan.
Paying Mortgage Insurance
Something important to know about the FHA 203(b) loan is that you will pay mortgage insurance twice. One time is at the closing; it’s called upfront mortgage insurance. The other time is on a monthly basis for the life of the loan. This is called the annual mortgage insurance.
The upfront mortgage insurance is equal to 1.75% of the mortgage amount. For example, if you borrow $200,000, you would owe $3,500 upfront at the closing. This helps fund the FHA’s reserve account, which allows them to guarantee the loans banks write under the FHA name.
If you don’t have the extra $3,500 or corresponding amount for your loan, you can wrap the fee into your FHA loan. This does not affect how much you must put down on the home either – you still only need 3.5% down.
The annual mortgage insurance is 0.85% of the outstanding principal balance. On the $200,000 loan, your annual MIP would start at $1,700 per year or $142 per month. HUD would adjust the premium amount each year on the renewal date according to the outstanding principal balance. During the first few years, the upfront MIP will stay fairly stable, as you don’t pay a lot of principal at the start of the loan. After you are several years into the loan term, though, you will start lowering the principal balance, which will lower the amount of MIP you must pay.
The FHA 203(b) loan is a great loan for first-time and subsequent homebuyers. It has flexible guidelines and low down payment requirements. If you have mediocre credit or little money to put down on a home, it’s a great way to help you become a homeowner.