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Understanding the FHA 203k Loan

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

If you’re angling to buy a home at a price you can afford, you may consider making some compromises, like looking outside your dream neighborhood, for example. You might also need to consider homes that aren’t in perfect shape, or even ones that require a complete overhaul. Fortunately, some mortgages allow you to wrap the costs of a remodeling project into the loan. This could be true when you use this type of mortgage to purchase a property, or when you decide to remodel a home you already own and refinance to access funds for your project.

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The Federal Housing Administration (FHA)’s 203(k) rehab loan is a popular option that works in these scenarios. This type of loan allows homeowners to roll remodeling funds into their primary mortgage.

In this guide, we’ll go over the following details to explain how the 203(k) loan works:

What is a 203(k) loan?

Imagine you want to purchase a $100,000 home that needs a minimum of $20,000 in upgrades and repairs to make it habitable, clean and safe. You could purchase the home and move in until you can finance the improvements separately, but you could also take out a 203(k) rehab loan that covers both the initial mortgage amount and the cash you need for repairs.

While many consumers use the 203(k) loan for purchases, also note these loans work for refinancing as well. In other words, if you already own your home but need cash for important updates and improvements, you could refinance your current mortgage with a 203(k) loan and borrow additional funds to pay for the repairs.

The 203(k) loan program offers two versions that work best for different situations:

  • The Standard 203(k) is perfect for updates and repairs, although there is a minimum repair cost of $5,000 and you have to work with a 203(k) loan consultant to complete the process.
  • The Limited 203(k) is for modest upgrades and repairs. This loan does not require you to use a 203(k) consultant, but the maximum repair cost cannot exceed $35,000. There is no minimum repair amount for this type of 203(k) loan.

Generally speaking, 203(k) loans can be used for projects that increase the value of your home, make it safer or improve structural integrity. The FHA lists the following eligible activities for loan funding on its website:

  • Structural alterations and reconstruction activities
  • Improvements to a home’s function or utility
  • Improvements that improve health or eliminate safety hazards
  • Changes that improve a home’s appearance
  • Replacing or repairing plumbing, a well or a septic system
  • Replacing or repairing roofing, gutters or downspouts
  • Replacing or adding flooring
  • Major site improvements or landscaping projects
  • Improvements that make homes accessible for people with a disability
  • Energy-use improvements

Eligibility for using a 203(k) rehab loan

While 203(k) loans tend to offer flexible terms for both borrowers and the homes they suit, they do come with some basic requirements.

Property eligibility requirements

For a property to qualify for a 203(k) rehab loan, it must have been completed at least one year before it is assigned a case number. This means 203(k) loans cannot be used for brand-new construction that is less than 1 year old. Other property requirements for 203(k) loans include:

  • Must be a one- to four-unit building of single-family homes
  • Can be a condominium if it is in an FHA-approved condominium unit; improvements are limited to the interior of the unit in most cases, and the unit is in a building with no more than four units
  • Can be manufactured housing if the upgrades and improvements do not affect the structural components of the building
  • Can be a mixed-use property with one to four residential units, provided at least 51% of the unit is residential
  • The home cannot exceed dwelling-unit limitations for the area
  • The home must be located in the United States.

Borrower eligibility requirements

There are also borrower eligibility requirements for 203(k) loans. These requirements determine who is eligible and under what circumstances.

To qualify for a 203(k) loan, you must:

  • Have a valid Social Security number (unless you are a state or local government agency, instrument of government or nonprofit approved by the U.S. Department of Housing and Urban Development, or HUD)
  • Be able to provide the lender with your SSN, name, date of birth, original pay stubs, W-2s, valid tax returns and any other required information to obtain a mortgage
  • Have a minimum credit score of 500
  • Be a U.S. citizen or an eligible noncitizen
  • Not have any delinquent federal tax debt
  • Not have a delinquent FHA home loan
  • Must live in the property as a principal residence.

How to get an FHA 203(k) rehab loan

To determine eligibility for an FHA 203(k) loan, you’ll need to search for a lender that’s approved to offer FHA loans. Fortunately, HUD offers a tool on its website that allows you to search for FHA-approved lenders in your area. It even includes a featuring of searching only for lenders that have dealt with a 203(k) rehab loan in the last 12 months.

If you plan to apply for a Standard 203(k) rehab loan, you’ll need to work with a 203(k) consultant. This consultant, who must meet stringent requirements in terms of their work experience and licensing, will inspect the property and prepare the architectural paperwork, work write-up and cost estimate for your project.

The FHA 203(k) consultant is also charged with overseeing the renovation funds, which are initially placed in an escrow account. Your consultant is able to sign off on when these funds are released to contractors and service providers working on your project.

Pros and cons of an FHA 203(k) loan

FHA 203(k) rehab loans come with both advantages and disadvantages. Some reasons to consider these loans are listed below, along with some of the pitfalls that make them a less attractive option.

Pros of FHA 203(k) loans

  • FHA loans have low credit-score requirements: You can qualify for an FHA 203(k) loan with a credit score as low as 500. It’s a much lower minimum standard credit score than many other types of home loans.
  • Wrap your remodeling costs into your home loan: The biggest benefit of FHA 203(k) rehab loans is that you don’t have to pay for remodeling costs out of pocket. You can wrap the costs of your project into your primary home loan instead.
  • Interest rates are typically lower than some other mortgage options: FHA loans also come with low closing costs, and FHA interest rates may be lower than some other types of home loans.

Cons of FHA 203(k) loans

  • Standard 203(k) loans require you to work with a loan consultant. Not only can working with a 203(k) loan consultant cost up to $1,000 in fees for the service, but this layer of work adds yet another step to the process. Remember that your 203(k) loan consultant will have to complete an inspection of the home, sign off on all improvements and their costs and address any health and safety issues.
  • Government-backed loans tend to come with a lot of rules. Government-backed FHA loans have many rules, and FHA 203(k) loans are no exception. For example, you cannot use this type of loan for “luxury items” including hot tubs, outdoor fireplaces or swimming pools.

Alternatives – other renovation loans

As you dig deeper into the prospect of taking out an FHA 203(k) rehab loan for home improvements, don’t forget there may be other options that work for your situation. Some 203(k) loan alternatives include:

  • Fannie Mae HomeStyle® Renovation: Fannie Mae’s HomeStyle Renovation loan is another type of home loan that lets you include renovation and repair costs in your mortgage amount. These loans tend to offer competitive rates that can be lower than those you can get with a home equity loan or home equity line of credit (HELOC), and they work for the purchase of a home as well as refinancing an existing home.
  • Home equity loan: A home equity loan lets you borrow against the equity in a home you already own to free up funds for repairs, renovations or any other type of spending. This type of loan comes with a fixed interest rate, fixed monthly payment and fixed repayment timeline.
  • Home equity line of credit (HELOC): A HELOC is a line of credit that works similarly to a credit card except but is secured by the equity in your home. These loans have fluctuating monthly payments that vary based on how much you borrow, as well as variable interest rates.
  • Personal loan for home improvement: Also be aware that you can take out an unsecured personal loan for home improvements. Like home equity loans, these loans come with a fixed interest rate, fixed monthly payment and fixed repayment timeline.

Conclusion

If the home you love needs some love, it’s nice to know there are plenty of ways to access the cash you need. Compare your options, including 203(k) rehab loans, and weigh the pros and cons of each before you decide.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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Mortgage

Here are the Best Low- or No-Down-Payment Mortgages

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Should you refinance with your current lender?
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It’s an often-cited rule of thumb, but you don’t actually need a 20% down payment to get a mortgage. In fact, you can get a home loan with little money down, and even a no-down-payment mortgage.

Assuming you’re financially prepared for all of the other responsibilities of homeownership, consider the following mortgage programs.

No-down-payment mortgage options

USDA loans

The U.S. Department of Agriculture (USDA) insures home loans made by approved lenders to eligible homebuyers in designated rural areas. As the program states, USDA loans were created to improve the quality of life in rural areas by giving families the opportunity to own a “modest, decent, safe and sanitary” home as their primary residence.

There’s no required minimum down payment or mortgage insurance, but there are guarantee fees. A portion of the fee is paid upfront and is 1% of the loan amount; the other portion is 0.35% of the loan amount and is paid annually.

To be eligible, you must:

  • Have a low-to-moderate income for your area
  • Buy a home in a designated rural area
  • Have a preferred minimum 640 credit score
  • Have a maximum 41% debt-to-income (DTI) ratio

VA loans

The U.S. Department of Veterans Affairs (VA) also offers a no-down-payment mortgage option guaranteed through its VA loan program. These loans cater to active-duty military service members, veterans and eligible spouses, and are offered by private lenders.

Borrowers aren’t required to make a down payment, but there is an upfront funding fee — which ranges from 1.4% to 3.6% of the loan amount — to help offset the program’s costs to taxpayers. The loan must be used to purchase a primary residence.

To be eligible, you must:

  • Have a certificate of eligibility from the VA
  • Have a preferred minimum 620 credit score
  • Show proof of stable income
  • Have a maximum 41% DTI ratio

Low-down-payment mortgage options

Fannie Mae HomeReady® and Standard 97% LTV

Fannie Mae has two low down payment conventional loans: HomeReady® and Standard 97% LTV. The HomeReady® mortgage program is open to both first-time and repeat homebuyers, while the Standard option requires at least one borrower to be a first-time buyer.

Borrowers can’t earn more than 80% of their area median income (AMI) if applying for a HomeReady loan. Additionally, if all borrowers on either a HomeReady or Standard loan are first-timers, at least one of them must complete an online homebuyer education course.

Both programs also require private mortgage insurance (PMI) if you make a down payment of less than 20%, though PMI can be removed after you reach 20% equity.

To be eligible, you must:

  • Have a 620 credit score
  • Have a 3% minimum down payment
  • Have a maximum 50% DTI ratio

Freddie Mac HomeOne and Home Possible

Freddie Mac’s HomeOne mortgage is reserved for first-time homebuyers and doesn’t include any income restrictions. The Home Possible® loan is an option for first-time and repeat buyers with a low to moderate income.

Your income must not exceed 80% of the AMI for a Home Possible® loan. You may qualify without a credit score, but your minimum down payment rises from 3% to 5%. Cancellable PMI is required for borrowers who put down less than 20%.

There’s a homebuyer education requirement for both HomeOne and Home Possible® programs when all borrowers on the loan are first-timers.

To be eligible, you must:

  • Have a 3% minimum down payment
  • Have a minimum 660 credit score
  • Have a maximum 50% DTI ratio

FHA loans

The Federal Housing Administration’s (FHA) low down payment home loans require just a 3.5% contribution and a 580 credit score. You can also qualify for an FHA loan with a credit score of 500 to 579 if you have at least a 10% down payment. Other FHA loans, such as construction-to-permanent loans and 203(k) loans, have the same credit score and down payment requirements.

FHA loans require upfront and annual mortgage insurance premiums (MIP). The upfront premium is 1.75% of the loan amount; the annual premium ranges from 0.45% to 1.05%, is divided by 12 and paid in monthly installments as an addition to your mortgage payment. Borrowers who put down at least 10% only pay mortgage insurance for 11 years; putting down less means you’ll pay MIP for the life of your loan.

To be eligible, you must:

  • Have a 580 credit score and 3.5% down payment
  • Have a 500 to 579 credit score and 10% down payment
  • Borrow within your county’s FHA loan limits
  • Have a maximum 43% DTI ratio

Good Neighbor Next Door

The Good Neighbor Next Door program from the U.S. Department of Housing and Urban Development (HUD) allows homebuyers in certain public service professions to buy a home at a 50% discount. If you qualify for and use an FHA loan to buy a home, the down payment is only $100, instead of the minimum 3.5% that’s usually required.

Eligible borrowers must buy a home located in a HUD revitalization area and commit to live in the home for at least three years. They must also sign a silent second mortgage for the discounted amount, though no payments are required if all program requirements are met.

To be eligible, you must:

  • Be a full-time pre-K through 12th grade educator, emergency medical technician, firefighter or law enforcement officer
  • Buy a home in a HUD revitalization area
  • Qualify for a conventional, FHA or VA loan
  • Live in the home for at least three years

Pros and cons of no or low down payment

Pros

Cons

  • Buy a home sooner. It can take years to save up for a larger down payment. By contributing 0% down or the lowest possible amount, you can reach your homeownership goal in less time.

  • Avoid depleting your savings. If you limit how much money you contribute to your home purchase, you can leave some of your emergency savings intact. Lenders want to know that you can weather financial hiccups, such as a job loss or income reduction.

  • Start out with less equity. The less money you put down, the less home equity you’ll have initially. This means your ownership stake in your home is much smaller, which may lead to pocketing less money if you need to sell in a few years.

  • Take out a larger mortgage. A no- or low-down-payment mortgage means you’ll be close to financing 100% of your home’s purchase price. A larger mortgage means a higher monthly payment amount.

  • Pay more in interest over time. The more money you borrow, the higher your interest rate typically will be. This also means you’ll pay more in interest over the life of your loan.

FAQs about mortgage down payments

Yes, there will be closing costs to pay on your home loan. Mortgage closing costs can range from 2% to 6% of your loan amount. You can pay these costs out of pocket at the closing table, or ask your lender about a no-closing-cost mortgage. With this type of loan, your lender will either increase your mortgage rate or add the closing costs to your loan amount, instead of having you pay those costs upfront.

It depends on the type of mortgage. Conventional loans require private mortgage insurance when you put down less than 20%, and it can be canceled after you’ve built at least 20% equity in your home. All FHA loans require mortgage insurance premiums, but if you put down 10% or more, you can get rid of MIP after 11 years.

Reach out to your loan officer and real estate agent for help identifying any down payment assistance programs you might qualify for. You should also check with your state’s housing finance agency.

Many loan programs let you use monetary gifts from family members, friends and others to help cover your down payment, but there must be a specific paper trail for the gift. The donor will need to submit a gift letter to show that you won’t have to repay the money being gifted to you. Consult your lender for specific guidelines.

Yes, your down payment amount can affect your mortgage rate. The less money you put down, the riskier you can appear to lenders, and they can account for this risk by raising your mortgage rate.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.

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Mortgage

5 Home Loans for People With Bad Credit

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

You don’t need a perfect credit score to get a mortgage — there are home loans for people with bad credit. But before getting this type of mortgage, find out how a lower credit score affects your overall borrowing costs.

Buying a home with bad credit

It’s possible to buy a home with bad credit — you could have a credit score as low as 500 and still qualify for a mortgage. The lower your credit score, though, the fewer lending options you’ll have and the higher your mortgage rate will be.

FICO scores, the credit scores used by most lenders, typically range from 300 to 850. Having a lower credit score translates to higher risk for a lender, and vice versa. Any score 669 or lower is considered “fair” or “poor.” Here’s a breakdown:

  • Exceptional: 800 and higher 
  • Very Good: 740-799
  • Good: 670-739
  • Fair: 580-669
  • Poor: 580 and lower 

Lenders like to see high credit scores because it exhibits an ability to manage debt, make on-time payments and use credit responsibly. Your creditworthiness will come into question if you plan on buying a home with bad credit, but it doesn’t have to hold you back from homeownership.

5 home loans for bad credit

Consider one of the following home loans for bad credit.

Fannie MaeHomeReady

Fannie Mae’s HomeReady mortgage program is an option for both first-time homebuyers and repeat buyers with limited access to down payment funds and a fair credit score. This conventional home loan has cancellable mortgage insurance for those who put down less than 20%, and gives borrowers the option to use boarder or rental income to help them qualify. If all borrowers on a loan are first-timers, at least one borrower is required to complete a homeownership education course.

Eligibility requirements include:

  • A minimum 620credit score
  • A minimum 3% down payment
  • A low- to moderate income

FHA Loans

Mortgages backed by the Federal Housing Administration (FHA) could be considered bad credit home loans because they make it easier for low-credit-score homebuyers to get a mortgage. FHA loans have a low down payment requirement, but you’ll pay mortgage insurance premiums (both upfront and annual) for the life of your loan. If you put down at least 10%, you can get rid of mortgage insurance after 11 years.

Eligibility requirements include:

  • A minimum 10% down payment for a 500-579 credit score
  • A minimum 3.5% down for a 580+ credit score
  • Borrowing within your county’s FHA loan limits

USDA loans

The U.S. Department of Agriculture (USDA) insures mortgages funded by approved lenders through the USDA home loan program. There’s no minimum required credit score, but a 640 score could help you get approved automatically if you meet employment and income requirements.

Eligibility requirements include:

  • No minimum required down payment
  • Meeting local income limits
  • Buying a home in a designated rural area

VA Loans

The Department of Veterans Affairs (VA) also offers bad credit home loans through approved lenders for active-duty service members, veterans and eligible spouses. The VA doesn’t have a specific credit score requirement, but lenders may require a minimum 620score. No down payment is required. Additionally, most borrowers will have to pay an upfront funding fee to offset the cost of VA loans to taxpayers.

Eligibility requirements include:

Non-qualified mortgage loans

The loans discussed above are all qualified mortgages, meaning they meet certain requirements that establish a borrower’s ability to repay a loan. There are also non-qualified mortgage (non-QM) loans, which have more wiggle room for high-risk borrowers, such as accepting credit scores below 500.

Eligibility requirements include:

  • Demonstrating your ability to repay the loan
  • A minimum down payment up to 20%
  • A maximum debt-to-income ratio of up to 55%

How to get a home loan with bad credit

Use the following list of tips as a resource to help you get a bad credit home loan.

  • Avoid applying for new credit. A new auto loan, credit card or personal loan application means you’ll have new inquiries on your credit reports, which can drop your credit score.
  • Dispute any credit report errors. Finding and disputing inaccurate information on your credit reports could improve your credit score and help lenders see you as a less risky borrower.
  • Pay your bills on time. Your payment history makes up the biggest chunk of your credit score at 35%, according to FICO. Making on-time payments can help boost your score and demonstrate your creditworthiness as a borrower.
  • Lower your outstanding debt load. Pay down your credit card and loan balances. Lenders don’t want to see that your income is stretched too thin to afford a mortgage. Keep your credit usage below 30% of your maximum credit limit across each of your accounts.
  • Don’t close any accounts. Closing old accounts, especially credit cards, shortens your overall credit history and can negatively impact your credit score.
  • Have your rent payments reported to the credit bureaus. As long as you’ve been maintaining an on-time rental payment history, having your rent payments reported to the bureaus may boost your score.
  • Make a larger down payment. A larger down payment can compensate for a lower credit score. Don’t completely drain your cash reserves, though. Keep three to six months’ worth of living expenses in a savings account for emergencies.
  • Pay for mortgage points. If you have the extra cash, consider buying mortgage points to lower your interest rate and overall loan costs. One point is equal 1% of your loan amount and can lower your rate by up to 0.25%.

Should you get a bad credit home loan?

Home loans for bad credit come with more risk for lenders, so you can expect to pay more as a borrower. Crunch the numbers with a mortgage calculator to help you determine whether to move forward with a bad credit mortgage or wait until your credit profile improves.

Here’s an example of how your credit score can affect your costs on a 30-year, fixed-rate mortgage:

 620 credit score760 credit score
Mortgage rate4.84%3.25%
Loan amount$200,000$200,000
Monthly payment
(Principal and interest)
$1,054.17$870.41
Total interest cost$179,501.82$113,348.55

As you can see, improving your score from “fair” to “very good” could amount to a mortgage payment that is nearly $184 less each month, saving you more than $2,200 each year and more than $66,000 in interest over the term of your mortgage.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.