The FHA 203(b) program provides a guaranteed insurance to its approved mortgage lenders financing the purchase or the refinancing of residential properties by eligible borrowers under its lending guidelines. The borrowers must currently occupy, or intend to do so, the residential property on which financing is being sought in order to become eligible under the FHA 203(b) loan guidelines.
The processing, underwriting and funding of mortgage loans insured by FHA are handled through the federal agency’s approved lenders. A wide range of lending institutions such as banks, credit unions, and mortgage lenders hold the FHA approval to provide financing under the guidelines of the department’s residential lending insurance mortgage programs. Basically, an FHA approved 203(b) lender funds the loan and the FHA provides the necessary insurance coverage for the mortgage in case of default, provided the loan is underwritten according to its lending guidelines.
203(b) Program History, Background, and Significance
As this FHA mortgage insurance program was authorized under Section 203, National Housing Act (12 U.S.C. 1709 (b), (i)), it came to be occasionally referred to as the FHA 203(b) loan, or commonly as the FHA loan.
The U.S. Department of Housing and Urban Development’s (HUD) Federal Housing Administration (FHA) division was created as a direct result of the housing crisis that followed the great depression during the 1930s. In its initial incarnation, its mandate has been to help save homeowners from going into default due to the devastating economic conditions that prevailed back in those days.
FHA approved lenders who originate and fund the home loans that meet the agency’s mortgage insurance program guidelines are protected against losses that may be incurred due to the default on the payments by the borrower. This protection from losses in case of default gives lenders the required incentive to provide financing to borrowers with less than perfect credit and low down payment and equity requirements.
The section 203(b) residential loan program is the FHA’s primary mortgage insurance program for expanding homeownership opportunities to borrowers who would otherwise not have the opportunity to do so from other alternative residential lending sources. For those who have difficulty qualifying for conventional loans, FHA may be their sole avenue for securing home financing at affordable terms.
The upfront MIP and annual insurance premiums collected from the borrowers by the FHA are pooled together into the FHA Mutual Mortgage Insurance Fund, which handles any claims due to the borrower default on FHA-insured loans such as the 203(b) program.
Eligibility Requirements for 203(b) Home Loans
- The borrower(s) applying for FHA 203(b) financing must meet or exceed the minimum FHA credit qualification requirements. A number of lenders may also set the credit score requirements higher than the minimum FHA credit eligibility guidelines.
- Borrowers may qualify for a maximum loan-to-value not exceeding 96.5% of the property value. The FHA insurance premium amount can also be rolled into the loan amount. In addition to the upfront FHA MIP, annual premium also must be paid by the borrower.
- Only residential properties with 1 to 4 units are eligible for 203(b) FHA home loans.
- In the case of a new purchase, the borrower must intend to occupy the property as their primary residence, and for refinance transactions under 203(b) loan guidelines, the borrower must currently be occupying the property as their primary residence. For either refinance or purchase, it’s mandatory that the borrowers are owner-occupants. Buyers or owners of second homes and residential investment properties are ineligible from qualification.
- FHA loan programs have very low down payment requirements. New home buyers can qualify for FHA financing under 203(b) program by putting just 3.5% of the property purchase price and qualify up to the max LTV of 96.5%. The lender underwriting your loan may ask for additional requirements if you seek the max LTV. Therefore, it’s best to contact the lender first and discuss their own qualifying criteria for FHA loans.
- The current FHA loan limit amounts establish the maximum amount of financing that can be provided by FHA lender to the borrower.
FHA 203(b) Repair Escrow for HUD-owned REO Homes
The owner-occupant buyers of a HUD repossessed REO home can finance the purchase along with any minor cosmetic repairs up to $5,000 using the repair escrow provision allowed under the 203(b) loan guidelines. This allowance for the financing of repairs is intended to increase the appeal of HUD homes to homebuyers.
In order to qualify, the property must meet specific appraisal requirements. The FHA appraiser must deem the property to be “insurable with repair escrows” and state that in their appraisal report. The total cost of the funds that may be allowed for the repair work should not exceed $5,000.
As stated before, the repairs should be minor and cosmetic. The proposed repair work must comply with the HUD minimum property requirements. (MPR) Therefore any non-MPR repairs are disallowed as they are ineligible under the program guidelines.
If the proposed renovation work involves major repairs such as structural problems or requires the involvement of professionals such as consultants, architects or engineers, then such a property doesn’t qualify under the FHA 203(b) repair escrow loan guidelines. In such cases, the 203(k) program may be more appropriate.
Attached and detached single-family residences and Planned unit developments, condo units in FHA approved condos, 2 -4 unit residential properties, log homes and modular homes are eligible under the FHA 203(b) property requirements. Condotels, Co-op units, manufactured homes and mixed-use properties do not qualify.
203(b) Vs. 203(k)
FHA 203(b) is the most popular of all the loan programs insured by FHA. This popular loan is can be used for the purchase or refinance of eligible residential properties by owner-occupant borrowers. But if the property is in need of substantial renovation and repairs, then the suitable loan program for the financing of both the acquisition and the cost of repairs is the FHA 203(k) renovation loan program.
Buying a HUD Home
Buying HUD (Department of Housing and Urban Development) homes is an affordable way to get your foot in the door of owning real estate. Whether you are looking to buy a home for personal use, or to use as a rental property, there are many repossessed (REO) homes that can be purchased through the Department of Housing and Urban Development (HUD).
Though navigating the real estate market can often be confusing for those buying their first home, buying a residential property through HUD is an easy and straight-forward process although it can at times be time-consuming.
HUD sells residential homes that have been foreclosed and repossessed due to non-payment. The HUD’s inventory of repossessed homes is primarily composed of residential properties that were previously financed under one of the many FHA mortgage insurance programs.
HUD REO Homes — More Home for the Buck
There are often hidden gems among the HUD listings, so be diligent about studying the area where you wish to purchase a home and learn to act quickly when a listing becomes available in that area. In a time when housing prices are often intimidating for new homeowners, buying HUD homes is a great way to become a homeowner and save money at the same time.
The availability of HUD REO properties makes the playing field a bit in favor for new home owners, making it possible to get great deals and purchase homes at a bargain.
The Financing process for buying HUD homes is similar to that of purchasing a home listed through traditional real estate channels. If you can qualify for a mortgage, you are eligible to buy a HUD REO home. If you don’t qualify for a mortgage, you will need cash to make a HUD property purchase.
HUD homes are bought through an online bidding process or auction. You need to be qualified well in advance from an approved HUD mortgage broker.
First Step In Buying HUD Homes
To get started buying HUD homes, you can view the current HUD homes listed for sale on the HUD HomeStore Site. Click on the state where you wish to find a property and then scroll down to Resources and click on “HUD Homes for Sale.”
It is wise to find a qualified HUD Real Estate Agent who can help you through the bidding process as well as finding the right home that fits your needs, objectives and is a good solid investment. As not all Realtors work with sellers or buyers of HUD homes, you need to find a HUD approved real estate agent with the necessary experience in assisting buyers of HUD homes.
HUD Properties Are SOLD AS IS!
It is wise to get an inspection before making an offer or a bid on any property but especially so for a HUD house. A qualified home inspector will check the internal systems and overall structure of a house to let you know whether you might expect problems down the line. An inspector will not typically inspect any appliances inside of a HUD property.
If it turns out that the house does need repairs, do not be dismayed. Often HUD homes are sold at prices that are low enough to account for the cost of repairs and renovation work that may need to be done, which is part of the appeal of these foreclosed homes to homebuyers and real estate investors.
You may also to be able to qualify for mortgage loan programs such as the FHA 203(K) program that allows you to not only buy a HUD home but also include the cost of repairs into the total amount of your mortgage.
Applying for a 203(b) Mortgage with an FHA lender
Finding an approved FHA lender with the expertise to process and finance 203(b) residential loans should be your first step towards securing the FHA financing you seek.
The complete list of qualified FHA lenders can be accessed from the FHA website. The search form allows options to filter the lenders according to the geographical area they service. In addition to the lenders, HUD approved home counseling agencies can also assist homebuyers regarding their eligibility for FHA mortgage loans such as the section 203(b) and 203(k) loans.