Ideal Borrowers for the 203k Loan Program
FHA loans are generally offered to specific subsets of the American population, notably those who are not good fits for conventional loans. These programs exist to help ensure that all Americans can purchase a home to call their own. However, each loan program differs to some extent in terms of those who will benefit from them. In the case of the 203(k) loan, you’re a good fit if:
Your credit is ok, but not great. Note that the FHA will insure your loan as long as you have a credit score of 620 to 640 or higher. If your credit score is between 640 and 580, a 203(b) loan might be a better fit, although it does not offer the ability to add in renovation costs, meaning you will likely need to find a different house to purchase. Note that the FHA only requires a credit score of 580 for the 203(k) loan, but most lenders require a higher credit score.
You have a decent debt-to-income ratio. The FHA requires that your debt load cannot exceed more than 43% of your income. Note that this will include the amount of your new mortgage payment, so you’ll need to have less than 43% DTI going into the process.
The home does not exceed the FHA’s maximum allowance for your geographic area. The FHA sets loan limits by specific areas – the same state may have multiple maximum limits depending on real estate prices.
The renovations will not exceed 50% of the home’s sale price. You are only allowed to roll a maximum of 50% of the price of the home into the loan to fund renovations.
The home is at least one-year-old. Remember that you cannot use the 203(k) loan to purchase a new home.
Have at least $5,000 in necessary renovations. Note that the $5,000 minimum is really the determining mark for the 203(k) program as a whole. From $5,000 to $35,000 falls under the streamline 203(k) loan heading, while over $35,000 is necessary for the standard 203(k) loan.
Have at least 3.5% of the home’s value as a down payment. Note that this program allows a maximum of 20% of the home’s value as a down payment.
Ideally, you will be interested in purchasing an existing home that is at least one-year-old and has at least $5,000 worth of renovations that need to be done as your primary residence. You will have a credit score of 640 or better, and at least a little bit of cash to use as a down payment. Note that a down payment is required, though. There is no FHA loan program that allows no down payment. Both the USDA and the VA have no down payment loan options, though, and it is worth considering whether you qualify for those if you are particularly cash-strapped.