203(b) Basic Mortgage Insurance
The FHA 203b loan is an ideal loan for the first-time homebuyer. A 203b loan has more flexible credit and down payment guidelines than traditional mortgages that make homes affordable for those who would not otherwise qualify. The program has many great benefits, one of which is that it allows borrowers to finance mortgage insurance into the loan.
Borrowers must apply for the loan through an FHA-approved lender. Only lenders who have undergone the FHA evaluation process may participate in the program. Not only that, but they must abide by strict guidelines for evaluating loans. The guidelines help ensure that all borrowers receive fair treatment when applying for their mortgage. Candidates may learn how to find an FHA-approved lender through referrals and research. Keep reading for more information on the FHA 203(b) mortgage, and how the program can help make owning a home more attainable.
What is an FHA 203(b) mortgage insurance loan?
The FHA 203(b) mortgage is a type of loan that promotes home ownership for those who may not qualify for a conventional mortgage. With less-stringent credit guidelines and lower down payment requirements, the 203(b) loan is ideal for first-time home buyers.
The program makes it possible for borrowers to purchase homes without the hardship of criteria and fees that would otherwise hinder their abilities to get approved for loans. A 203(b) loan is a type of FHA mortgage that allows borrowers to finance mortgage insurance into their loans. The coverage is a form of protection for lenders against losses, if the borrower defaults on the loan. With mortgage insurance, the lender can file a claim with the FHA to recoup a portion of the credit loss incurred, as a result of the borrower’s default.
Most FHA borrowers are required to purchase mortgage insurance, due to the low loan-to-value ratios on their mortgages. Rather than collecting the fee for the insurance up front, lenders allow borrowers to pay for it as a part of their monthly 203(b) mortgage payments. In that way, the borrower’s out-of-pocket costs are lower. Not only that, but the borrower will not need to worry about paying a separate bill each month.
Benefits of the FHA 203b Loan
Borrowers take advantage of FHA 203(b) loans due to their affordability. The 203b loans make it possible for those with adverse credit to obtain homes, as the lender does not automatically exclude a borrower due to a low credit score. Also, not all applicants have the cash reserve to pay for many of the fees associated with a conventional mortgage. As such, lenders require less of a down payment than would be needed for a traditional loan.
Applicants of the 203(b) loan can receive their down payments in the form of a gift, which is typically prohibited with other types of loans. Also, sellers can pay certain closing costs. When sellers pay closing costs, it reduces the cost of the loan, and reduces the out-of-pocket costs for the applicant. Additionally, lenders allow borrowers to finance the mortgage insurance into the 203(b) loan. See more details on the benefits of this program by downloading our comprehensive guide.
Qualifying for an FHA 203(b) Loan
Applicants for the FHA 203(b) loan type must meet all eligibility guidelines outlined by the FHA. They must apply for the 203(b) loan through an FHA-approved lender. Lenders approved for the program must adhere to FHA underwriting guidelines to evaluate all applicants using the same set of standards. The standards ensure that lenders exercise fair lending practices, and that all borrowers receive objective evaluation when applying.
When borrowers apply for the 203b loan, they must also submit all required documentation to support their applications. Lenders use the information on the loan application and documentation to determine whether to finance the home.
Borrowers who wish to qualify for this type of loan must occupy their homes as their primary residences. The home must be a single-family home to qualify. Next, lenders require applicants to make a down payment, based on the purchase price or appraised value of the house. Also, lenders require borrowers to have a loan-to-value ratio of no more than 96.5 percent. In addition, applicants for the 203(b) program must have credit scores of at least 580 to qualify.
Borrowers with lower credit scores may be eligible. However, they may be required to make more substantial down payments. Applicants should check their credit before applying to clean up outstanding items that would impact their chances at getting loans. Also, if a borrower does not meet the credit requirement, the lender can offer suggestions on how to improve his or her credit so that they can then reapply for the 203(b) mortgage at a later date.
Download our complete guide for full details on how to qualify for the 203b loan, and the documents required to do so.
Locating an FHA-Approved Lender for a 203(b) Loan
The FHA program is optional, and not all lenders offer 203(b) mortgages. Therefore, only lenders approved by the FHA may offer the FHA 203(b) loan. Loan applicants must first find an FHA-approved lender to learn how to apply for an FHA loan successfully. Borrowers must ensure that their lenders are designated to participate in the program before applying. Applicants may locate lenders by viewing the list of approved lenders on the Department of Housing and Urban Development (HUD) website.
Candidates for the 203(b) loan may also find a lender through referrals from family, friends or colleagues. They may also seek referrals from other property professionals, such as their real estate agents. Borrowers should always verify the credentials of any potential lender before applying. They should check online reviews to ensure the company has a positive reputation.
Borrowers should also check with their state brokers or banking license agencies to see if the companies have brokers’ licenses. Lastly, candidates for the 203(b) loan should always check the company’s rating with the Better Business Bureau (BBB).