The FHA provides excellent loan programs for borrowers with less than perfect credit or very little money to put down on a home. In addition to these benefits, the FHA also offers the 203K program, which allows you to make changes to your home, whether repairs that allow the home to meet with FHA approval or changes to meet your own specific needs or desires. The costs of the renovations you make are wrapped into your FHA loan, giving you one mortgage for the purchase and renovation of your home. The benefit of the FHA 203K program is that the 203K Streamline rates that are offered are typically lower than you would obtain on a 2nd mortgage, otherwise known as a home equity loan as any loan that takes second lien position typically has higher rates. In general, the typical FHA 203K rates are slightly higher than general market rates for a standard FHA loan, but low enough that many people can afford the payments.
How 203K Streamline Rates are Determined
Just as is the case with standard FHA loans, the FHA 203K Streamline rates are determined by the market. This means that the FHA has nothing to do with the interest rates that are set for your 203K loan. The state of the economy is how the base rates are determined, but the actual rate you are provided is a combination of the base rate that is offered to everyone and the adjustments which are necessary to compensate for your individual financial situation. As a general rule of thumb, the better the economy is doing, the higher mortgage interest rates climb. You can determine what rates are going to do based on what you hear about the stock market as well as the unemployment rates. The higher stock prices are and the lower the unemployment rate is, the higher the mortgage rates will be, but on the contrary, the lower the stock prices are and the higher the unemployment rate, the lower the mortgage rates. Generally, the Fed has nothing to do with the rates offered – it is strictly based on the economy unless the Fed has to step in to stimulate the economy or slow things down to keep them in control.
The Varying 203K Streamline Rates
Not every borrower will receive the same 203K Streamline rates however. No matter what rates are doing at any given time, there are still adjustments that apply to every person’s rate. This means the rate you are offered might be distinctly different from the rate your neighbor receives. Everyone starts with the same base rate, as is offered to the lender by the lending institutions, but the adjustments will vary the rate accordingly.
- Credit Score – The largest factor affecting your 203K rate is your credit score. The FHA is among the most forgiving when it comes to low credit scores, even offering loans to those with a score as low as 500 as long as they are able to put down 10% of the purchase price on the home. That being said, not every lender will provide funding to someone with a 500 credit score, but those banks that do will offer a higher interest rate to those borrowers because they are a much higher risk than someone with a credit score of 650, for example. Generally, the higher your credit score, the lower your interest rate will be.
- Debt Ratio – Your debt ratio says a lot about your financial responsibility. If your debts are more than 35% of your total monthly income, you are considered a higher risk as 35% is considered to be the average for debt ratios. This is not to say that the FHA or a lender would not approve your 203K Streamline loan with a debt ratio higher than 35%, but it does mean that your rate will be slightly higher in order to compensate for the higher risk.
- Term of the Loan – Your loan term plays a role in the interest rate you are provided as well. From a lender’s perspective, a 15-year mortgage is less risky than a 30-year mortgage because the amount of time you have to pay the loan is cut in half. In addition, your mortgage payments on a 15-year term take more money off of the principal portion of your loan, which means you have more equity in the home. Generally, the more equity a person has in their home, the more likely they are to make their payments in order to avoid losing their investment.
All of these conditions being considered, the FHA Streamline rates might be slightly higher than what you would receive on a standard FHA loan. In some cases, they can be as much as 1% higher. This is strictly due to the extra work that is involved in the 203K Streamline loan. The lender does not just close on your loan when you purchase it, disburse the money, and sell your loan. Instead, they have to stay involved in the process until all of the work is completed on your home. In some cases, an inspection will be necessary for the lender in order for them to disburse the remaining funds to the contractors. The lender holds onto the portion of the loan that was reserved for the remodeling of your home and only disburses it in two payments – one in the beginning of the process to get the work started and the final one when the work is completed and all liens have been removed.
In some cases, you can buy your interest rate down to make 203K Streamline rates a little less expensive for you. This depends on what type of rate you want and how long you plan on staying in the home. Some people prefer to pay the higher rate than paying money out of their own pocket for a lower rate. Others prefer to pay the money upfront and have the lower monthly payment. If you plan on staying in your home for the foreseeable future, it makes sense to buy that rate down, but if you know this home purchase is just for the short-term, taking the higher interest rate might make more sense.