FHA 203k loan requirements and guidelines for qualifying: What buyers and homeowners should know before applying.
The FHA 203k loan for renovation has the same qualifying requirements as a standard FHA 203b loan which has the most flexible guidelines with minimal down payment than any other type of loan at this time. The difference between the two is that the FHA 203K will allow for the repairs, rehab or remodeling of your home to be included into the new loan while the FHA 203B won’t.
So, what are those qualifying guidelines:
Credit and Credit Scores:
Although lower credit scores are acceptable with FHA loans most lenders will require a minimum credit score of 640. Depending on the lender the minimum credit score can vary and exceptions could be possible.
Bankruptcy and foreclosure:
Chapter 7 is allowed if it has been 24 months after the discharge date, provided that good credit has been re-established.
If the Chapter 7 is less than 24 months (but not less than 12 months) it may be allowed provided the reason for the BK was due to extenuating circumstances. Along with that the buyer or homeowner should be able to exhibit the ability to manage financial affairs currently and that the BK isn’t likely to recur.
Chapter 13 is allowed after 12 months of the pay-out period provided the performance has been satisfactory and customer receives court approval to enter into the mortgage transaction.
Foreclosure or Deed-in-Lieu is allowed after three years.
Court ordered judgments and tax liens must be paid.
For existing homeowners Tax liens may be included in the refinance.
Income and qualifying ratios:
The FHA 203k like all FHA loans are full documentation loans meaning proof of income is required.
Full or part time income can be counted with two years of continuous history with some exceptions for schooling, training, maternity leave etc.
Self-employed /1099 income must be stable with a two-year history.
Rental income is also acceptable
Miscellaneous income is acceptable, including child support, alimony or maintenance payments and Note income but must show a 12-month history and evidence that the income will continue for the next three years
Qualifying ratios are 31/43% which means up to 31% of your gross income ( for w-2 earners) or (net income after expenses for 1099 & self employed) can go towards the total house payment and up to 43% of your income can go to both the total house payment and other revolving & installment debts. These ratios are bench marks but can be exceeded with an automated approval or compensating factors.
Flexible Down Payment, Source of funds and Reserves:
3.5% minimum down payment is required and can come from checking, savings or other depository accounts such as 401k’s. Down payment and closing costs can also be a gift from relatives, significant others or cash-on-hand with paper trail.
Contributions up to 6% for closing cost can come from interested parties involved in the transaction such as the seller and cash reserves are not required on 1-2 unit properties
Well, I hope this helps in giving you a general idea on what the FHA 203k guidelines and requirements are for qualifying. Keep in mind that each lender can have their own variation when it comes to qualifying so the sooner you get started the sooner you will know what to expect.
If you think an FHA loan is right for you then a lender who can do both the FHA 203B and FHA 203K will give you even more options and possibilities.
To contact a FHA 203K /203B Specialist go to the 203K Mortgage Lender Directory to find a lender for your state.