What is the difference between an FHA 203(b) mortgage and an FHA 203(k) loan?

Are FHA 203(b) loans and 203(k) loans the same thing? What's the difference and why are they named so similarly? People often get these two HUD sponsored FHA loan programs confused because there's literally a 1-character difference in the name ("b" versus "k"). But in reality, they are very different types of programs. The 203(b) is the standard FHA insured loan program requiring low down payments and other first-time-homebuyer friendly features. It's also knowned as the "Basic Home Mortgage Loan."

A 203(k) loan is an FHA-insured mortgage featuring much of the same requirements as 203(b), but it also allows homeowners to finance the cost of rehabilitating a "fixer-upper" home into the mortgage. People use the FHA 203(k) program when they want to purchase a home that is need of anything from minor improvements, such as replacing gutters, to virtual reconstruction of the home, such as major structural alterations.

The FHA 203(k) is known as the "203(k) Rehab Mortgage Insurance" program

Unlike the FHA 203(b) Basic Home Mortgage Loan which is used by many first-time homebuyers to purchase a move-in ready home, the FHA 203(k) is called the Rehabilitation Mortgage Insurance program and is used by first-time as well as experienced homebuyers to purchase fixer-upper homes that need work before they are ready to be lived in. And FHA approved lenders can feel confident loaning you the money because FHA will "insure" your mortgage on these types of properties. Without this protection of FHA backed insurance, most lenders would deem these types of fixer upper homes inadequate to secure a mortgage, and they wouldn't offer loans to homebuyers. Think of it like this: if you were the lender of a mortgage on a dilapidated run-down house, you wouldn't feel very confident if the borrower foreclosed on the mortgage because it would be harder to sell the property and get your money back. So, the FHA 203(k) Rehabilitation Mortgage Insurance program solves this problem by making sure the lender gets their money back in this situation.

Why is the 203(k) rehab loan needed at all?

When buying a fixer upper house that needs major improvements or repairs, homebuyers usually have to follow complicated and costly processes with separate improvement loans to cover the costs of these repairs. These improvement loans traditionally have higher interest rates and a short term with a big balloon payment at the end. The FHA 203(k) rehab program lets the homebuyer get a single, long term, fixed rate (or adjustable rate if desired) loan that covers both the purchase of the property plus the cost of repair and improvement.

The FHA 203(b) is called the "Basic Home Mortgage Loan" and is NOT used for fixer-uppers

Unlike the 203(k) rehab loan, the FHA 203(b) Basic home mortgage loan is not used to repair a fixer upper home. Instead, it's used to buy a move-in ready house and is often a good mortgage choice for first-time home buyers because of the simple borrower requirements such as low down payments, low credit scores, and generous loan to value ratios.

Many first-time homebuyers choose the FHA 203(b) mortgage because you only need a minimum downpayment of 3.5% and you can have a less than perfect credit score of 500 - 580 to potentially qualify. The 203(k) rehab loan also has these borrower-friendly features but because the home being purchased is in need of repairs or rennovations, it typically isn't the first-time homebuyer that's getting a 203(k) loan.

Borrower Requirements for an FHA 203(b) Basic Home Mortgage Loan

If you are interested in buying a move-in-ready house using the FHA 203(b) Basic Home Mortgage Loan program, then you should get familiar with the eligibility requirements for borrowers, which we have listed below. Note that most of these requirements also apply to the FHA 203(k) rehabilitation loan.

• 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.
• 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.
• 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.
• 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.