What is the FHA 203(b) Standard?
The FHA 203(b) mortgage is the standard FHA loan used to finance the purchase of a single family home. Backed by the US Department of Housing and Urban Development, FHA loans are offered with low rates and can be easier to qualify for in many scenarios when compared to other programs available. This, coupled with an extremely low down payment requirement, makes them very popular among first time homebuyers and repeat buyers alike.
FHA loans are very versatile and can be used effectively in a wide variety of scenarios for owner occupied properties. They can be used to finance the purchase or refinance of one or two unit homes, manufactured homes (including single wide homes, multi-width homes, and manufactured housing condo projects), condominiums that are FHA HARP approved, and planned unit developments.
FHA Loan Basics
- Purchase and Refinance Options (Rate and Term, Cash Out, or Simple)
- Upfront Mortgage Insurance Premium can be financed
- Borrower must pay annual insurance premium
- Fully Amortizing Fixed Rate
- 10 year, 15 year, 20 year, 25 year, and 30 year term options
- One to Four Unit Homes, Manufactured, Approved Condos, PUDs
- Primary Residence Only
What are the benefits?
Low Down Payment
One of the primary reasons that FHA loans are so popular is the very low down payment requirement. Saving funds to put down can be a large obstacle to homeownership and this program makes buying a home much more attainable for many consumers. For a purchase transaction the down payment requirement can be as low as 3.5%, for a rate and term refinance the equity position as low as 2.25%, and for a cash out refinance the equity position as low as 15%.
Low Mortgage Rates
FHA loans tend to have very competitive interest rates, even for consumers with less than perfect credit. This makes it an excellent choice for borrowers who may have a difficult time qualifying for other programs. The fully amortizing fixed rate options provide the security of a fixed rate throughout the loan term.
Who is eligible for an FHA Loan?
Eligibility will be determined by examining the borrowers’ income, assets, liabilities, and credit history and score, as well as the market value and condition of the property to be financed.
Some of the requirements include:
- Borrower must intend to live in the home as his or her primary residence
- The amount borrowed must be within FHA loan limits which vary by county and are higher in parts of the country where real estate is more expensive
- 580 minimum FICO score
When is an FHA Loan a good fit?
An FHA loan can be a useful solution whenever trying to minimize the down payment, equity position, or out of pocket expenses. First time buyers often find this program attractive as they don’t have equity built up in another property which they can sell in order to access funds for a large down payment.
Even if buyers have the savings available to put down they may prefer to reserve it for another purpose. This could be emergency or retirement funds, an investment, or even a down payment on another property such as a second home or rental property for which larger upfront costs may be required.
FHA loans can also be easier to qualify for when compared to many other programs, meaning they are often a great option for borrowers with credit issues. Even with a less than perfect credit history it may be possible to be approved to purchase or refinance a property with an FHA loan. Once the loan is closed paying the mortgage on time every single month can be an excellent way to help rebuild credit and improve scores over time.
FHA Purchase Loans
FHA mortgages are very popular for purchase transactions, in large part due to the low down payment requirement. An FHA appraisal will be required which will be used to determine current market value, and an inspection is needed to ensure that the home meets the minimum standards set by HUD for health and safety. If any major issues are discovered they must be addressed prior to closing.
Refinancing with an FHA Loan
There are several refinance options available with a standard FHA mortgage.
Rate and Term Refinance
A new loan that pays off the balance of an existing mortgage. Common motivations for a rate and term refinance are to move to a lower interest rate, to lower the monthly mortgage payment, or to go from an adjustable rate mortgage to a fixed rate loan.
Cash Out Refinance
A new mortgage which pays off the current home loan, and then the homeowner receives additional funds at closing. This money can be used for any purpose such as education, home improvement, to pay off other debts, or as a down payment on another property. There must be enough equity in the property so that the balance of the existing mortgage and the additional amount borrowed equal no more than 85% of the property value; 80% LTV Max Cash-Out is effective for Case Number assignments on or after 9/1/19.
Simple Refinance
Used to pay off an existing FHA loan with a new FHA mortgage. There is no cash out permitted, but closing costs can be financed into the new loan.
Other Programs to Consider
When an FHA loan isn’t the right choice for a borrower’s situation some other options to look at include:
- To finance a home purchase and renovations to the property: FHA Standard 203(k) Loan
- For zero money down options: VA Loan, USDA Rural Housing Mortgage
- Limited documentation option for refinancing an FHA loan with a new FHA loan: FHA Streamline Refinance
