FHA Borrower Requirements for the 203(k) Loan Program
The FHA has requirements that pertain to borrowers, properties, and even lenders. However, the requirements for borrowers are the most important to understand. They are as follows:
Credit Score: Your credit score is one of the single largest determining factors in whether you can use a 203(k) loan, or if you need to apply for a 203(b) loan, and, by extension the type of property that you can purchase. While the FHA only requires that borrowers have a credit score of 580, most lenders require that you have a credit score of between 620 and 640. The reason lenders require a higher credit score for 203(k) loans is because of the increased risk and the size the loan, even with FHA mortgage insurance.
Note that in addition to being at least 620 to 640, you also need “good” credit in that you cannot have damaged your credit through negligence or carelessness.
Down Payment Amount: The 203(k) loan requires a minimum down payment of 3.5% of the home’s purchase value. That money can come from almost anywhere, as well, including as a gift from a family member or as a bonus from an employer. Personal savings, investment capital and other funding sources are also allowed. Put down as much as possible as a down payment if for no other reason than to reduce the principal of the loan.
Employment and Income: You must be able to show sustained employment for some time. In most instances, this will be a minimum of 12 months, but your lender will have specific requirements in terms of proof of employment and income verification. Be prepared to show paycheck stubs, as well as providing your lender with access to your bank account (via statements). Documents that show you are financially stable are necessary, including your tax returns (two years as a minimum), as well as proof that you have experienced no late payments within the preceding 12 months, and have not gone through bankruptcy or foreclosure within the preceding three years.
Debt to Income Ratio: The 203(k) loan requires that borrowers have no more than 45% debt to income ratio, or DTI. Someone earning $50,000 per year would need to pay $1,875.00 per month in expenses or less. Note that this does not apply to any sort of discretionary spending, such as groceries or gas for your vehicle. Your DTI is calculated based on recurring expenses, like your car loan, school loans, or utility payments.
Closing Costs: Closing costs can range from 2% to 5% of the total cost of your loan, and must be paid on top of other fees and charges assessed during the loan origination process. For instance, a loan of $250,000 may have closing costs as low as $3,000, or they could be over $10,000. Actual closing costs will vary from lender to lender and borrower to borrower. Closing costs can be rolled into the cost of the loan itself, but this is not always advisable, as it means that borrowers will be paying interest on those costs.