FHA loan requirements

FHA Fixer Upper Loan vs. Standard FHA Mortgage: The Differences Explained

posted in: Mortgages

Did you know 65% of homes in the United States are owner-occupied? While this figure is lower than the global average, it’s higher than most Western European countries.

Yet, despite a healthy number of owner-occupied homes, many still struggle with how to purchase one. Between a down payment, closing fees, and securing a mortgage, buying a home is one of the most costly processes most will ever face.

But for some, securing an FHA loan will significantly help. It could be the difference between renting and building equity.

Continue reading to learn more about FHA loan requirements and the types of loans you can apply for.

What Is a Standard FHA Mortgage?

Federal Housing Administration (FHA) mortgages are government-issued loans. The FHA approves the loan, and a bank or other lender issues it.

Standard FHA mortgages finance a primary residence.

They have a lower minimum down payment requirement compared to other home loans. Applicants tend to have lower credit scores than what most lenders require.

Since the government insures the loans, lenders are more willing to loan money to those who might not be eligible for conventional mortgages.

The government created the FHA loan in 1934 during the Great Depression when default and foreclosure rates were sky-high, and 50% down payments were standard.

The idea was to reduce the risk for lenders and make it easier for borrowers to get home loans.

Today,the FHA loan helps low- and moderate-income families buy homes.This loan especially assists first-time homebuyers.

Over time, the FHA created four more types of loans in addition to the standard mortgage.The one you’ll learn about next is the 203(k) mortgage.

What Is an FHA Fixer-Upper Loan?

The official name of the FHA fixer-upper loan is the FHA 203(k) loan. Some other names for this loan include:

  • HUD 203(k)
  • Rehab loan
  • FHA construction loan

This particular type of FHA loan allows you to buy or refinance a home that needs repairs. You get to add the renovation costs to the mortgage. This means you pay for the renovations over time as you pay down the mortgage instead of upfront.

It’s ideal for those willing to work on fixing up a home to add more equity to it.

FHA 203(k) financing is also away to extend your homebuying possibilities, particularly in areas with soaring home costs.

These loans have rules about how much money you can borrow for renovations. They also have stipulations on what renovations you can undertake with the funds.

If you want to use a 203(k) loan, you usually need a licensed contractor authorized by an FHA appraiser. In some cases, you also need a HUD 203(k) consultant.

Limited vs. Standard Loan

There are two types of FHA 203(k) loans. The limited or streamlined loan provides up to $35,000 for renovations. However, you cannot use this money for major structural repairs.

The standard loan starts at $5,000 and allows for renovations to major structural repairs. But, this loan requires you to hire a HUD consultant to oversee the renovations.

Eligible Projects

You can use an FHA 203(k) loan for many renovation projects. For example, you can improve your home’s functionality or attractiveness. This includes changing the landscaping.

You can also eliminate health and safety hazards or make the home more accessible for a disabled person.

Other eligible projects include:

  • Plumbing or sewer systems
  • The roof, gutters, and downspouts
  • Flooring

To get a complete list of approved projects, speak to a HUD consultant.

FHA Loan Requirements

As mentioned, FHA home purchase loan requirements are different from conventional loans. They are lower, making these loans more accessible.

Still, you need to show a history of:

  • Paying off debts
  • Steady employment
  • Sufficient income

If you have a credit score of 580 or above, you can borrow up to 96.5% of the value of a home. That means you only need to put down 3.5% when purchasing the home.

Conventional loans recommend putting down at least 20% on a home, even though many put down less. Putting down less often results in a higher interest rate.

If your credit score is between 500 and 579, you can get an FHA loan, but you need to make at least a 10% down payment.

With an FHA mortgage, your down payment can come from:

  • Savings
  • A family member as a gift
  • A down payment assistance grant

Conventional mortgages don’t have down payment assistance programs and limit the amount that can be gifted.

FHA loans have borrowing limits, but these depend on your location. The range is roughly between $421,000 and $970,000.

They also require mortgage insurance. So it’s an additional cost to consider when applying for an FHA loan.

Further, if you foreclosed on a home in the past three years, you won’t qualify for an FHA loan.

How to Get an FHA Loan

All FHA home loans have the same application and approval process.

First, you need to find a lender and fill out the paperwork.Not all lenders are FHA-approved, so you need to find one who is.

Likewise, consider your needs as a home buyer. For example, some lenders are great at handling poor credit, while others are better for first-time buyers.

During the application process,you’ll need to provide your personal details like:

  • Social Security number
  • Income
  • Credit check
  • Debt-to-income ratio

Then, if you want a 203(k) loan, you need to provide additional paperwork. Take time to examine the property carefully. You need to include a detailed list of repairs and cost estimates. The more you have on your list; the more your lender can see how you plan to use the funds.

Consider an FHA Loan Today

Regardless of which mortgage you want to apply for, the FHA loan requirements remain the same. This allows you to consider different housing options when looking for your dream home.

To explore your FHA loan options,contact us at 7th Level Mortgage. We’ll help you understand your loan eligibility and help secure the best possible rate.

At 7th Level Mortgage, we are an experienced team of mortgage professionals based out of New Jersey and serving the east coast from Pennsylvania to Florida, including Delaware and Maryland. We have won numerous awards for our excellent professional work and reputation with clients for being extremely diligent, accessible, and hands-on throughout the entire mortgage process.