FHA 203k Loan Requirements

What Are FHA 203k Loan Requirements and Guidelines for Qualifying?

What buyers and homeowners should know.

The FHA 203k loan for renovation has similar qualifying requirements as a standard FHA 203b loan which has the most flexible guidelines with minimal down payment than any other type of loan currently.

The difference between the two is that the FHA 203K will allow for the repairs, rehab, or remodeling of your home to be included into the new loan while the FHA 203B won’t.

So, what are those qualifying guidelines:

Credit and Credit Scores for 203k Loans:

When it comes to credit and credit scores, it's important to understand how they affect FHA loans and specifically the Renovation 203k loan program. While FHA loans may be more flexible with lower credit scores, individual FHA lenders usually have their own minimum credit score requirements, this also applies to Lenders who specialize in doing 203k loans.

The 600+ Club

Now, let's talk 203k credit scores - that three-digit number that holds quite a bit of sway.

Here's the deal:  Standard FHA 203b loans and 203k loans have a bit of a score face-off. It's like comparing apples to oranges. When you're surfing the web, you might come across sources tossing around some lower credit score figures.  This is where the difference is, between FHA lenders. Standard FHA 203b loans without Rehabilitation funds may be allowed a lower credit score threshold than FHA 203k Loans.  So . . . .

What are the FHA 203k Credit Score Requirements?

The required credit score on a 203k loan with the minimum 3.5% down-payment will typically be above 600+ for most 203k Lenders to increase likelihood of approval.  For credit scores below 600 and as low as 580 it’s best to ask your specific 203k Lender and for even lower credit scores a larger down-payment will be expected to help counterbalance a less-than-ideal credit history.

Now, why the difference, you ask? Because your new home loan is not just about buying a home, but also about giving it a facelift or a complete rehab so this double-duty adventure finances both.

Understanding Income and Qualifying Ratios for FHA 203k Loans

Whether you earn income through full-time or part-time employment, it can be taken into account, as long as there is a consistent two-year history. However, there are some exceptions for instances like schooling, training, or maternity leave.

For those who are self-employed or receive income as a 1099 contractor, it's important that your income demonstrates stability over a two-year period. This showcases to lenders that your earnings are reliable and consistent.

Moreover, if you have rental income, it is recognized as a valid source of revenue for loan qualification purposes.

In addition to regular income sources, miscellaneous forms of income are also considered acceptable. This includes payments such as child support, alimony, maintenance, and Note income. To be eligible, this miscellaneous income should have a documented 12-month history. Furthermore, there needs to be evidence indicating that this income will continue for the next three years.

What Are 203k Income Qualifying Ratios?

The amount of income you can dedicate towards your new house payment plus all your monthly credit debts is 43% of your gross income which is called your “debt to income” (DTI).  Now a 43% DTI is an FHA guideline but if needed you could get approved to use 50% or more of your gross income towards your new house payment and monthly debt obligation with compensating factors.  These compensating factors might include a particularly strong credit history, substantial employment tenure, or a significant financial reserve.

For W-2 earners, this calculation is based on your gross income, while for 1099 and self-employed individuals, it's based on net income (after expenses).

What is the minimum FHA 203k Down Payment?

A mere 3.5%—that's the minimum amount required as a down payment for a 203(k) loan. This modest sum opens the door to your home’s possibilities, allowing you to transform a fixer-upper into your desired home.  And the source of these funds is as versatile as the loan itself. Your down payment can stem from your checking account, nest egg in a savings account, or even be drawn from sources like a well-padded 401(k). This flexibility enables you to tap into various financial sources to kick start your home ownership journey.

Gift Funds Are Allowed

But that's not all. The 203(k) loan program understands that sometimes, a little help from loved ones can make all the difference. Enter the option of down payment and closing costs as a gift. Relatives or significant others can contribute, easing the financial burden and turning a collective dream into reality. Additionally, for those with a stash of cash-on-hand, a carefully documented paper trail can serve as a legitimate source for down payment and closing costs.

203k Closing Costs and Contributions: Unraveling the Options

The financial perks of the 203(k) loan don't stop at the down payment. A further advantage lies in the contribution towards closing costs. Interested parties involved in the transaction, which may include the seller, can contribute up to 6% of the closing costs. This additional leeway offers a breath of fresh air, particularly for those navigating the intricacies of a real estate transaction.

Moreover, when it comes to cash reserves, the 203(k) loan takes a more relaxed stance for 1-2 unit properties. Unlike many other loans that mandate a cushion of cash reserves, this program recognizes that different properties come with different financial demands. This is a testament to the program's adaptability, making it an attractive choice for a wide array of home buyers.

Have Questions? Ready To Get Started?