The 203K loan is actually an FHA program with many similarities to the standard FHA loan. You will find the qualifying factors to be the same as well as the fact that the FHA backs the loan for the lender who actually funds the loan. In addition, however, the FHA plays another role in the 203K process – they require that you use an FHA 203K loan consultant to help you through the process. There are two different requirements regarding this professional, depending on which type of loan you use – either the full 203K or the streamlined version.
Setting the Qualification Factors
The first way the FHA is involved in your 203K loan is the minimum qualifications they set. Your loan file has to meet these requirements in addition to any requirements the lender adds as they are the ones funding the loan. The minimum qualifying factors for the FHA loan include:
- Credit score higher than 580 (some exceptions allow a score as low as 500 but with a down payment of 10% rather than 3.5%)
- Debt ratios around 31/43, however, there is some flexibility depending on the lender
- Steady job history for the last 2 years unless there are specific reasons for a job change within that time, such as a promotion or job loss due to circumstances outside of your control
- Solid housing payment history for the last 12 months
The FHA is rather flexible with its qualifying guidelines, but some lenders might restrict that flexibility. Shopping around with different FHA approved lenders that have experience in the 203K loan process can help you find the lender that is the best fit for your needs.
Another role that the FHA plays in the 203K loan process is the guarantee they provide the lender. This is the reason that FHA guidelines are a bit more flexible than any other program’s underwriting guidelines. The FHA guarantees the lender that they will pay them should the borrower default on the loan. The FHA gets the money to pay the lenders back on defaulted loans from the upfront mortgage insurance and annual mortgage insurance that you pay on any FHA loan, including the 203K loans.
The FHA Loan Consultant
Last, but not least, is the use of the FHA loan consultant on both the full 203K loan and the streamlined loan. The loan consultant has a variety of jobs, especially on the full 203K loan including:
- Help you find a home that can be improved as not all properties are feasible when it comes to including the costs in the loan. The loan consultant should have plenty of experience in the field and be able to be your eyes and ears when it comes to finding a home that will work out the best for you
- Write up the work that needs to be done and negotiate with the contractors accordingly. This helps to take the stress off of you, especially if you are not knowledgeable in this area as it is very easy to get taken advantage of in this area.
- Help you choose the contractor that is right for the work you need to be done.
- Help with the loan paperwork that needs to be completed as well as with any discussions or negotiations that need to be done with the lender.
- Disburse the funds according to the contract and as the inspections are completed by the consultant.
If you are using the streamline 203K, the loan consultant plays a lesser role, but still can assist you with the following:
- Complete the write-up for the work that needs to be done on the home.
- Help you choose the right contractors.
The only required job for the loan consultant on the streamline 203K is the write-up of the repairs. The loan consultant does not have to perform any inspections for the streamlined version of this loan; the appraiser completes the necessary inspections on this one.
The FHA plays a role in the entire 203K loan process; it just depends on the type you choose. With any FHA loan, however, the FHA has their minimum qualification guidelines along with the guarantee they provide the lender. You will have to shop with an approved FHA lender in order to take advantage of this great program; however, always ensure that the lender has plenty of experience in 203K loans and not just FHA loans for the smoothest process.