Fha 203 Loan Qualifications
Home buyers or homeowners must meet certain minimum requirements in order to qualify for a rehab loan. These requirements are similar to normal FHA loan requirements. Among them, youll find that:
- Youll need to work with an FHA-approved lender in order to apply for the FHA 203 loan.
- Lenders require applicants to possess a of at least 500.
- An FHA 203 loan requires a minimum down payment of 3.5% for those who possess a credit score of 580 or above, and 10% for those with a lower score.
- Lenders calculate your debt-to-income ratios, where your front-end DTI should not exceed 31% and your back-end DTI should be no more than 43%. If you have a higher credit score, you may be able to have a slightly higher DTI depending on lender policies.
- A 203 loan can only be used if the property is to be the borrowers primary residence.
- Repairs and renovations must be performed by a contractor and not by the borrowers themselves.
Reverse Mortgages Vs Traditional Mortgage Or Home Equity Loans
A reverse mortgage is the opposite of a traditional mortgage. With a traditional mortgage, you borrow money and make monthly principal and interest mortgage payments. With a reverse mortgage, however, you receive loan proceeds based on the value of your home, the age of the youngest borrower, and the interest rate of your loan. You do not make monthly principal and interest mortgage payments for as long as you live in, maintain your home in good condition, and pay property taxes and insurance. The loan must be repaid when you pass away, sell your home, or no longer live in the home as your primary residence.
Home Equity Conversion Mortgage
- A Home Equity Conversion Mortgage, or HECM, is the only reverse mortgage insured by the U.S. Federal Government, and is only available through an FHA-approved lender.
Which Properties Qualify
For starters, your property of choice should first pass the general loan requirements set by the FHA. But to qualify for the 203K Program, the home should be:
- Situated in a location where you want to move in
- Has been torn down but the structural foundation remains in place
- A single family home usually for four that has been constructed and completed for at least a year
- Is not a co-op, although condos are considered eligible
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Cons Of Fha 203 Loans
- Application process can take a lot of time and paperwork to complete
- FHA 203 loans cannot be used for investment properties
- Monthly mortgage insurance premium is required
- Projects may require you to hire and work with a HUD consultant
You may find that closing costs associated with FHA 203 loans are in line with those associated with alternate types of mortgages and refinancing. These expenses go to cover standard fees such as those for appraisals, inspections, lender origination, title search and insurance, credit reporting, property surveys and more. Select lenders may apply additional fees for extending these loan packages, though.
Bank Of America Customer Service Reviews
Bank of America has an overall above-average reputation for customer service, according to J.D. Powers 2020 customer satisfaction survey.
Mortgage-related complaints at major lenders
Bank of America mortgage complaints
In 2019, Bank of America received 245 official complaints from mortgage customers. To put that in perspective, Bank of America underwrote a total of 466,552 mortgage loans in 2019. So it received approximately one complaint for every 2,000 mortgage customers.
Thats a higher number of complaints than many other big-name mortgage lenders, but still fairly low overall.
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Get Into Your New Home For Less
FHA, VA and Rural Development loans can help borrowers into a home for less money with relaxed requirements.
FHA Loans are backed by the Federal Housing Administration. They typically have been used to help lower-income individuals borrow money to purchase a home.
VA Loans are backed by the US Department of Veterans Affairs. These loans are designed to help American veterans and their spouses obtain long-term financing for the purchase or refinance of a primary home.
Rural Development loans are backed by the US Department of Agriculture. These loans are targeted toward houses in rural communities.
These loan programs are available through Arvest. Our mortgage lenders can answer any questions and help you determine if a FHA, VA or Rural Development loan is the best mortgage loan option for you.
What Is An Fha Loan
A Federal Housing Administration loan is a government-backed home mortgage loan with more flexible lending requirements than conventional loans. Because of this, FHA mortgage interest rates may be somewhat higher. The buyer will also have to pay monthly mortgage insurance premiums, along with their monthly loan payments. FHA loans come in 15- and 30-year options. Check out todays 30-year FHA rates.
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How Much Can Be Borrowed
In general, the more your home is worth, the older you are, and the lower the interest rate, the more you will be able to borrow.
The maximum amount that can be borrowed on a particular loan program is based on these factors:
- The age of the youngest borrower at the time of the loan
- The appraised value of the home
- Current interest rates
How Does A 203 Loan Work
A 203 loan bundles your mortgage and renovation funds into one loan. Once you close on the loan, a portion of the loan proceeds is paid to the seller of the home, and the remaining balance goes toward the renovations.
To be eligible for a 203 loan, the home needs to be at least one year old and renovation costs need to be a minimum of $5,000. In addition, the amount borrowed cant be more than the areas FHA loan limit, the homes value after the renovation or its value before renovation, whichever is lowest.
You also cant use a 203 loan for just any project. Youll need to comply with the requirements for eligible renovations, which include replacing the roof and floors, enhancing the home for accessibility reasons or making energy efficiency improvements.
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How An Fha 203 Rehab Loan Works
The biggest benefit of an FHA 203 rehab loan is having the ability to wrap the purchase price and the renovation costs all into one loan with a competitive interest rate. That means you dont have to pay for remodeling costs out of pocket.
A 203 loan is specifically for a property that is distressed or going to be improved. This is not for people who are afraid of paying mortgage insurance, or for people who just want a turnkey property, Pierre says.
But this type of mortgage comes with a lot of paperwork, a longer timeline, and a larger chance of things not going as planned during the process.
Part of why the 203 isnt super popular is it is pretty complex and it can be kind of frustrating for people to go through, says Kyle Seagraves, a mortgage broker and educator in Dayton, Ohio.
If youre considering an FHA 203 loan, you should know there are two versions: the standard 203k and the more popular limited 203.
The standard 203 version allows for repairs which can include major structural changes and repairs in excess of $35,000, whereas the limited 203 version is ideal for minor home improvements costing less than $35,000. To qualify for the standard 203 loan, the renovation costs must be greater than $5,000.
With an FHA 203 loan, you can borrow up to 110% of the homes expected market value once all the repairs are complete, or the home price plus renovation costs, whichever is less.
What Is An Fha 203k Loan
An FHA 203k loan allows you to finance not one, but two major items:
This loan addresses a common problem when buying a fixer home: lenders often wont approve loans for homes in need of major repairs.
Because the lender tracks and verifies repairs when using a 203k loan, it is willing to approve a loan on a home it wouldnt otherwise consider.
That said, for a lender to approve financing, the home must already meet certain safety and livability standards.
If the home is too run down, you wont be able to use an FHA 203k rehab loan.
This program can be a good option for people on a tighter budget, who want to buy an older or rundown home and repair it rather than buying a more expensive turnkey home.
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What Is Mortgage Insurance
Private mortgage insurance protects the lender in the event that you default on your mortgage. Typically, if you make a down payment of less than 20% of your homes purchase price, you will incur PMI. How much youll pay for this insurance will vary, depending on factors that include the size of your down payment and your credit score.
Bank Of America Offers The Fha 203k Streamline Loan
While it is true that Bank of America offers the FHA 203k streamline loan, the truth is that if you are considering getting an FHA 203k loan, you are going to be well served to get multiple quotes from multiple lenders to see who has the best deal.
At the end of the day, it is possible that Bank of America will have the best deal on a FHA 203k streamline for you but it is also possible that they wont.
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Conventional Loans Vs Fha 203 Loans
Looking at other options for financing or renovating your home? You may consider a conventional loan, although it differs from an FHA 203 loan. Conventional home loans require borrowers to possess higher credit scores and make larger down payments in some cases, but also allow applicants to implement more “luxurious constructions and updates than the FHA would otherwise approve.
At the same time, conventional loans may also come with more stringent application requirements and higher interest rates attached as well. Youll want to research potential lending options up-front and make a point to shop around and compare rates and terms before committing to an offer from any lender. Doing some basic financial groundwork here may ultimately help you realize significant financial savings in the end.
Using The 203k Loan Step By Step
Here are the steps youll complete when buying a fixerupper with an FHA 203k loan.
Its a little different from a regular loan, because youll be submitting your list of home improvements, and the loan doesnt completely fund until the improvements are complete.
When the loan closes and funds, the seller gets paid. The rest of the money from your lender goes into your escrow account.
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Equal Credit Opportunity Act
But there is a light at the end of the tunnel. As long as your 401k, pension, or Social Security benefits are scheduled to continue for over three years, getting an FHA loan can be a fairly straight forward process. In fact, your age or retirement status should not even be a factor in getting a loan as long as your finances fit into the FHA guidelines. The Equal Credit Opportunity Act has made it illegal for a lender to discriminate against age for any qualified borrower.
Tips For Comparing Fha Loans
FHA loans can be an excellent mortgage choice for borrowers with low credit scores and with little cash on hand to make a down payment. Borrowers who put less than 20% down on an FHA mortgage will pay a mortgage insurance premium or MIP, which is usually around 1% of the loan. The MIP can be paid upfront or over the life of the loan.
FHA loans require borrowers to have a minimum FICO score of at least 580 to qualify for a 3.5% down payment. Borrowers with FICO scores between 500 and 579 will need a 10% down payment.
One other thing to know: The FHA requirements are minimums. Lenders can make it tougher to get a loan. Many lenders, for example, require a credit score of at least 600 some set an even higher bar, requiring a minimum 620 FICO score.
Whats more, not all lenders offer FHA loans, but you should be able to find out by searching the lenders website. Once you determine whether they offer FHA loans, find out what rates they offer, any lender fees, what the minimum credit score is and the minimum debt-to-income ratio. These are the nuts and bolts of all FHA mortgages.
After you collect information, you can decide which lenders you want to apply to. If your application is approved, the lender will give you a loan estimate and from there you can see which lenders are offering the lowest rates and fees.
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Streamlined Refinance And Assumable Loans
One of the most important advantages of an FHA loan is the ability for the loan to be assumed. This gives the buyer a significant advantage in a high interest rate market. FHA loans are eligible for streamlined refinance, a program HUD offers that allows the borrower to easily refinance the loan to reduce their interest rate and lower their monthly payment.
What Are The Types Of 203k Programs
203K is divided into two categories based on the limitations of repairs allowed for each loan.
The Full or Standard 203K Program allows maximum benefits for significant repairs that include structuring, remodeling, or landscaping, among others. If you are thinking of adding a garage or a room, this is the 203K program for you.
On the other hand, the 203K Streamlined Program is more limited and is provided for non-structural repairs such as new roofings, repainting, and energy-conservation improvements. The total cost of the repairs should not exceed the $35,000 limit.
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Fha Benefits For Seniors
FHA loans can be great for seniors because they generally offer lower interest rates, lower down payments, approve lower credit scores, and sometimes cover closing costs. Fannie Mae and Freddie Mac both offer retirement fund annuitization procedures that require lenders to divide 70% of the value of a borrower’s fund over 360 or 180 months of the loan’s terms. This could significantly boost the amount of income in the senior’s 401k account. Not all mortgage companies offer this product, so many sure you ask your loan officer if this is something available to you. The AARP website has great information about all of the special programs for seniors, click here for more info.
- No appraisal required
FHA Streamline 5/1 Adjustable Rate Refinance Mortgage:
- FHA 5/1 ARM establishes a lower initial interest rate for the first five years, then the market determines your rate
- Adjustable Rate Mortgages typically have lower interest rates than fixed rate loans
- Useful if you plan on selling your home in the near future.
Other FHA Loan Considerations
For FHA loans, typically the property being financed is to be your primary residence and the loans cant be used for investment or rental properties. However, eligible residences include semi-detached homes. townhouses, row houses, and certain condominiums.
Have more questions on FHA loans? Take a look at our FHA vs Conventionalpage.
Can I Refinance Into A 203k Loan
Most people use the FHA 203k loan to buy a home, but it can be used for refinancing, too.
As long as you have at least $5,000 in improvements, you can use this refi option.
The lender will order an appraisal that shows two values: the asis or current property value, and the improved value after renovations.
Your maximum refinance loan amount is the lowest of these three calculations:
- The existing debt before rehab, plus the estimated cost of improvements and allowable closing costs
- The asis value plus rehab costs
- 110 percent of the afterimproved value x 97.75%
If you have owned the property for less than one year, the lender must use acquisition cost, plus the documented rehabilitation costs, for your maximum loan amount.
You do not need to have an existing FHA loan to use an FHA 203k loan for refinancing.
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Fha 203k Loan Requirements For 2021
A 203k is a subtype of the popular FHA loan, which is meant to help those who might not otherwise qualify for a mortgage.
FHAs flexibility makes 203k qualification drastically easier than for a typical construction loan.
203k credit score requirements
FHA allows credit scores down to 580, although some lenders might require a score of 620640 to qualify for a 203k loan.
Still, thats much lower than the 720 or higher you would probably need for a conventional construction loan.
Minimum down payment
FHA requires just a 3.5 percent down payment, based on the purchase price and total project cost. For instance:
- Home price: $200,000
- Total project cost: $25,000
- Down payment: $7,875
You can receive 100 percent of your down payment requirement via a gift from family or an approved nonprofit organization.
Income and debt requirements
Lenders will examine your debttoincome ratio, too. This is the comparison of your monthly income and debt payments.
Typically, less than 43 percent of your income should go toward your proposed mortgage payment plus all other debts.
Thats $430 in payments per $1,000 of beforetax income.
For example, if your income is $5,000 per month, your future house payment plus auto loan payments, student loan payments, and credit card bills shouldnt exceed $2,150 per month.
Using an FHA 203k loan, you can borrow up to 110% of the propertys proposed future value, or the home price plus renovation costs, whichever is less.