Why is a FHA 203(b) Loan called a "Basic Home Mortgage Loan?"

While the name "FHA 203(b)" sounds complicated, it ironically stands for something called a Basic Home Mortgage Loan. It's called a Basic Home Mortgage Loan because the eligibility requirements are pretty basic: Anyone can apply for an FHA insured 203(b) mortgage as long as they are the owner occupants of the property and they intend to use the mortgaged property as their primary residence.

The FHA 203b is also called a Basic Home Mortgage Loan because the downpayment requirements are pretty low compared to conventional loans. It's possible to get an FHA loan with a down payment as low as three and a half percent (3.5%)! For example, if you are getting a mortgage for $200,000 you might be able to put down as little as $7,000 to get that new house!

Another reason the 203b might be considered "Basic" is because the credit score requirements are also lower than typical conventional loan programs. FHA guidelines say that a minimum credit score of 500 is required. In reality, most lenders require a higher score than 500. Usually it's closer to 600, which is still pretty low compared to conventional loan requirements.

All of the requirements to qualify for an FHA 203(b) loan are pretty basic. That's why it's a good program for first-time homebuyers and people that just need a "basic" mortgage to get started owning their own home.

Who Would Want to Choose an FHA 203(b) Loan?

The Basic Home Mortgage Loan 203(b) is suited for almost anyone, but it's especially good for borrowers that do not have a lot of money for down payment. As mentioned earlier, in some cases you only need 3.5% down payment. With most conventional loans, you'll need at LEAST 5% down payment. So, an FHA 203b loan is a good route for new to-be homeowners that don't have a large pile of cash to put down.

People with less than perfect credit will appreciate FHA 203(b) loan as well. FHA guidelines say that if you have a credit score between 500 and 579, then you're still "in the game" so long as the loan-to-value is 90% or less. In plain language, that means that if your credit score is somewhere in the 500 - 579 range, you can still qualify for an FHA loan as long as it's not more than 90% of the value of the home. For example, if the house is worth $100K, then your mortgage can't be more than $90K if your credit score is in that 500-579 range. Put another way, if your house is worth $100K, and your credit score is 500 - 579, then you'll need to put down at least $10K. Whereas, if your credit score was 580 or above you may be eligible to put down just $3500 for that same $100K house.

If you have a credit score of 580 or above, you're in even better shape with the FHA 203(b) program because you would be eligible for "maximum financing" with a loan to value of 96.5%. In plain language, this means that if you have a credit score 580 or greater, then you're eligible to put as little as 3.5% as a down payment on a home purchase. As an example, if the house is worth $100K, then your down payment could be as low as $3500 if your credit score is above 580.

First-time homebuyers are a perfect fit for the FHA 203(b) Basic Home Mortgage. This program is often chosen by new homeowners to assist them in buying that first home. However, it's not restricted to just first-timers. Some people think the "FH" in FHA stands for "First-time Homebuyer" because it's used so often for that purpose (the "FH" actually stands for "Federal Housing", as in "Federal Housing Authority").

Where Can I Apply for an FHA 203(b) Loan?

In order to apply for an FHA 203(b) Basic Home Mortgage Loan, you must work with an FHA-approved lender. One way to verify that a lender is FHA approved, is to visit the HUD Lender List Search page on the Department of Housing and Urban Development's website. This page is a bit unwieldy and can be a little confusing to use, but we recommend you enter your ZIP code, and then select within a "25 mile" radius in order to search for FHA-approved lenders in your area.

You can also apply through online lenders that are FHA approved. Here is a short list of a few online mortgage lenders that offer FHA 203(b) Loans:

• Rocket Mortgage
• Quicken Loans
• Guaranteed Rate
• LendingTree (they don't lend directly, but will match you with lenders)

Prefer to work with a local lender in person? A good way to find local FHA approved lenders where you can apply for a 203(b) Basic Mortgage Loan is by using Google Maps and searching the key phrase "fha approved lenders near me." You should get a map full of pins representing banks, mortgage brokers, and lenders that are all FHA approved. we get it. Sometimes, it just feels better to speak to someone nearby that you can visit face to face and get a comfort level before applying for a mortgage.

How Long has the FHA 203(b) Loan Been Around?

According to HUD (The Department of Housing and Urban Development), the 203(b) is the "centerpiece of FHA's single family mortgage insurance programs" and is the successor to the program that was enacted way back in the 1930s to help save homeowners from default during the Great Depression! The Basic Home Mortgage Loan (aka the "203(b) mortgage insurance program from FHA"), is the centerpiece of all FHA mortgage insurance programs for 1 to 4 unit residential properties, including individual condo units or manufactured homes on real estate. The purpose the 203(b) program is to provide approved lenders with mortgage insurance to protect them against the risk of default on mortgages that are made to qualified buyers who may not otherwise qualify for conventional loans or who live in underserved areas. These mortgages can be used for purchasing a new home, or can be used to refinance an existing mortgage.

Am I Borrowing From The Government in an FHA 203(b) Loan?

No. You borrow from an FHA-approved lender, like a bank, mortgage broker, or mortgage lender in your area or online. The government supports these lenders by providing insurance for the mortgages in case borrowers don't pay and default on the loan. Since the lenders feel secure knowing that they have mortgage insurance on the loans they give out, they are more willing to lend to borrowers that might not have a lot of cash for down payment, and/or might have a lower credit score.

According to the FDIC (Federal Deposit Insurance Corporation), the Section 203(b) Mortgage Insurance Program "may help community banks access the secondary market, providing greater liquidity to enhance their lending volume. Special feature programs are responsive to different mortgage types (e.g., adjustable-rate mortgages) and populations (e.g., disaster victims, Native Americans, Native Hawaiians). The Section 203(b) Mortgage Insurance Program may allow community banks to expand their customer base in low- and moderate-income communities and to a broader range of borrowers. Loans originated through the Section 203(b) Mortgage Insurance Program may receive favorable consideration under the CRA (Community Reinvestment Act), depending on the geography or income of the participating borrowers."

Is the FHA 203(b) Loan the same thing as the FHA 203(k) Loan?

No. The 203(k) loan is called a "rehab loan" and is used to "rehabilitate", or repair and upgrade, a home that is need of significant repair. The 203(b) loan is used mostly for ready-to-move-in homes (not a fixer-upper that might need a little TLC). They are both FHA insured loans, however. Not all lenders offer 203(k) loans. For example, Rocket Mortgage offers 203b loans, but not 203k loans. So make sure to check your lenders before applying if you are looking to borrow money on a rundown house that you want to repair and fix.

FHA 203(b) Borrower Eligibility and Criteria

As you might imagine, the eligibility requirements for an FHA 203(b) mortgage are fairly "basic." That is, they are not too stringent. Most people are eligible to apply for an FHA 203(b) loan. Here are the basic requirements to check if you qualify:

• Credit Score of 500 or greater: If your credit score is between 500 and 579, then you're limited to a maximum LTV (loan to value) of 90 percent. If the your credit score is 580 or higher, then you are eligible for "maximum financing" with a loan-to-value ratio (LTV) of 96.5 percent.
• Income Limits: Great news - There is no income limit to participate in the FHA 203(b) program! The only thing regarding income that is really important, is that FHA requires lenders to analyze your income and determine if your income level is likely to stay consistent over the next 3 years after the mortgage begins. If they determine that your income looks unstable and could drop in the near future, it might be harder to get approved. So, when applying for an FHA 203b loan, it's a good strategy to do so after you've been working steadily for at least 3 years.
• Type of Home: Must be a one-to-four-unit family dwelling (i.e., most typical single family homes or condos). Also, it must be an owner-occupied primary residence. It can't be an investment property that you plan to rent out. You have to live in the house as your primary residence.
• Refinancing Allowed?: Yes! The 203(b) program can be used to refinance a mortgage you may have on your existing home.
• Loan Limits: FHA 203(b) mortgage limits are specific to the county that the property exists in. HUD issues a Mortgagee Letter announcing the new mortgage limits every year. You can lookup your specific FHA loan limit in your county by searching at the HUD's FHA mortgage limits website.

Links and Resources for FHA 203(b) Loans

Here are some links to official resources regarding the FHA 203(b) Basic Home Mortgage Loan program. If you are the type that likes to take a deep-dive into all of the details, then follow these links and do additional research.

• HUD 203(b) Mortgage Insurance
• FDIC - 203(b) Mortgage Insurance Program
• Office of the Comptroller of the Currency: FHA's 203(b) Home Mortgage Guarantee
• CFPB - Consumer Financial Protection Bureau
• Section 203(b) of Title 24 - Code of Federal Regulations