FHA 203b and 203k: What’s the Difference?

The Federal Housing Administration is a force to be reckoned with on the real estate market because it supplies at least 50% of all loans acquired by new and existing homeowners. The loans insured through this federal program are typically given to people who either cannot qualify for a conventional loan or who would pay far more than necessary through the conventional method. The majority of the people who benefit from the federal housing program are low and middle income families who have blighted financial histories or finances that need some improvement. Because of it sway in the marketplace, the FHA is able to offer a wide variety of loans, two of the most popular being the FHA 203b and the 203k. While these loans are both offered through the federal program, they are very different from one another.

The FHA 203b is the Standard Loan

Family at homeFor most people the loan that is acquired through the federal program will be the FHA 203b. This loan is the most popular loan offered because it is your basic home loan. Nothing fancy, no bells and whistles, just a simple loan. It can be approved for the purchase of single family homes or multi-family buildings which house no more than four apartments. A requirement of this loan is that the home you are purchasing has to be your primary residence. If there are multiple units, it is required that you occupy one of them.

The 203b loans are enticing to people for a few different reasons. First you can get a loan with imperfect credit and poor financial history, even if you have had a bankruptcy or foreclosure within the last seven years. If either of these have occurred, you will have to wait two or three years depending on the situation, and you will have to prove that you’ve taken the steps to improve your credit. Along these same lines, the qualifications for a federally insured loan are much more lenient than those for a conventional loan. It’s not uncommon for a homeowner to be denied the conventional loan but approved through a federal lender. People also gravitate toward the federally insured loan because they can get into the home while paying a small amount down, sometimes as low as 3.5 percent. This small number is hugely enticing when you figure that even a small difference of two or three percent can mean a difference of thousands paid up front.

The FHA 203k

While the FHA 203b is the most popular loan used for the purchase of single family residences, it is of no help if the home you are looking to buy is in need of major repairs. You may be able to use the loan to purchase the home, but then you will be stuck trying to finance all of the repairs on your own, which for some people is nearly impossible. The FHA 203k is in place for these situations. The purpose of the loan is to provide enough funding for the homeowner to turn the broken down fixer upper into a livable, beautiful home that would be easily resold at any point in time. There are two reasons for this. First, it gives the homeowner more buying options. And second, if a fixer upper home is in a neighborhood it can drop the value of the surrounding homes and ruin the appeal of the neighborhood. By fixing them up, the long term value of the neighborhood improves and everyone benefits. The 203k loan is the federal way of maintaining beauty and value in a neighborhood. If you want to pursue a rehabilitation loan, the qualifications are similar to those necessary on a ‘standard’ federally insured loan. However, there are a few additional steps necessary before approval can take place; you will have to submit more paperwork and additional inspections, so the exact value of the home can be determined as well as the amount of money necessary to complete the repairs. The amount given will be the current value of the home plus the estimated amount for repairs, or 110% of the projected value of the home.

Both of these loans offer a unique advantage to the potential homeowner, but they were each created with the same end goal in mind. That goal is to get the homeowner in a house he loves while maintaining the integrity of the neighborhood. So whether you are buying a fixer upper or just fell in love with the house at the end of the street, there is a loan in place for you

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