FHA 203(b) loans vs. 203(k) loans

One is for move-in ready homes, and the other is for fixer-uppers

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FHA home loans are for potential buyers who need a little help getting into a property. After all, these loans come with easier credit qualifications than other types of mortgages, down payment requirements as low as 3.5% and closing costs lower than average.

But, there's more than one type of FHA loan, and each type has its own purposes and qualification requirements. Read on to learn about FHA 203(b) loans versus 203(k) loans, their major differences and how to decide between them.


Key insights

FHA 203(b) loans are the most common type of FHA loans, and they’re for home purchases and refinancing when a home is move-in ready.

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FHA 203(k) loans are for the purchase or refinancing and rehabilitation of a home that’s at least one year old.

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Both types of FHA loans come with minimum down payment requirements as low as 3.5%, relatively easy credit requirements and low closing costs.

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What are FHA home loans?

FHA loans are offered through the Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD).

Because the U.S. government backs these loans (similar to VA loans for military members and USDA loans for rural properties), lenders can offer better terms, including down payments as low as 3.5%, low closing costs and lower credit score requirements than conventional home loans.

FHA loans can be accessed for the purchase of single-family homes as well as multi-unit properties with up to four units. However, there are preset limits on how much funding you can access.

In 2024, the nationwide mortgage limit "floor" for single-family homes is set at a maximum of $498,257. However, single-family homes in high-cost areas in the United States can qualify for up to $1,149,825 in funding through the FHA.

According to Phil Crescenzo Jr., the vice president of the Southeast division at Nation One Mortgage Corporation, consumers can qualify for two types of FHA loans: FHA 203(b) loans and FHA 203(k) loans. Where the FHA 203(b) loan is the standard FHA loan, the FHA 203(k) loan allows for property repairs, upgrades and renovations to be financed as part of the purchase.

» MORE: What is an FHA loan? Your guide to FHA mortgages

How FHA 203(b) loans work

When you hear about FHA home loans, the reference almost always applies to FHA 203(b) loans. These standard FHA loans get the most attention from lenders. This kind of mortgage aims to help people purchase or refinance a principal residence, although these loans can apply to homes with up to four units.

Eligibility requirements for FHA 203(b) loans can be easier to meet for buyers who have limited funds to purchase a home. Credit score requirements for FHA 203(b) loans are also lower than you'll find with conventional mortgages.

While FHA 203(b) loans are government-backed home loans, traditional mortgage lenders offer them. Also, be aware that FHA loans don’t have traditional private mortgage insurance (PMI) but instead come with their own. Buyers who take out FHA 203(b) loans must pay an upfront mortgage insurance premium (MIP) and monthly mortgage insurance premiums.

FHA 203(b) eligibility requirements

The fact FHA loans are easier to qualify for is a huge part of their appeal. Crescenzo points out that most applicants can qualify for FHA loans with a credit score of at least 580 and a down payment of just 3.5%. Applicants for this type of FHA loan can also qualify with a credit score as low as 500 if they can come up with a down payment of at least 10% of the purpose price of a property.

Homes that qualify for an FHA 203(b) loan can be single-family homes or multi-unit homes with up to four units. Mortgage amounts must also fall under FHA loan limits for the area of the country in which a home is located.

Note that there are no income limits that apply with FHA home loans. However, you can only use these loans for homes you intend to occupy as your primary residence for at least one year.

» COMPARE: Best FHA Loan Lenders

How FHA 203(k) loans work

Where traditional FHA loans are geared toward home purchases and refinances in situations where a home is ready to move into, FHA 203(k) loans are for purchases and refinances in instances where the property needs rehabilitation. A borrower can use these for homes that are at least one year old, and a portion of the loan proceeds goes to the seller (or to pay off the existing home loan in a refinance).

Meanwhile, the remaining funds are put into an escrow account so the borrower can use them when upgrades and repairs to the home are complete.

These loans are available in two main tiers: a standard 203(k) mortgage and a limited 203(k) mortgage. The limited 203(k) mortgage is for more limited renovations since it only lets consumers access up to $35,000 in funds within their mortgage to repair, improve or upgrade their home.

The standard 203(k) mortgage is for more substantial updates, although costs for renovations must be at least $5,000, and the total value of the property must also fall within the FHA mortgage limit for the area.

Renovations and repairs these loans are for include (but are not limited to):

  • Structural repairs
  • Elimination of health and safety hazards
  • Updated kitchens and bathrooms
  • Reconditioning or replacing plumbing
  • Installing a well and/or septic system
  • Adding or fixing a roof, gutters or downspouts
  • Updating or replacing flooring
  • Energy-efficient home improvements

Crescenzo says that because these loans allow homeowners to finance the cost of renovations within their home loan upfront, FHA 203(k) loans can be an excellent choice for those buying homes that other buyers may have overlooked due to their condition. He also shares that homes that have been sitting on the market for a while can often be secured for a lower cost, which can mean even more value for buyers who use these loans.

Also, FHA 203(k) loans come with upfront and monthly private mortgage insurance requirements, just like FHA 203(b) loans.

FHA 203(k) eligibility requirements

Just like traditional FHA loans, no income caps apply with FHA 203(k) loans. The same credit score requirements also apply based on down payment amounts. Borrowers with a credit score of at least 580 can qualify with a 3.5% down payment, whereas applicants with credit scores from 500 to 579 need a down payment of at least 10%.

Individuals who apply for an FHA 203(k) loan will need to occupy the home as their primary residence for at least one year. FHA mortgage limits also apply.

» MORE: FHA loan requirements in 2024

Should you get an FHA loan?

According to communications manager Carl Holman of A&D Mortgage, LLC,  FHA 203(b) loans are best suited for homebuyers looking to purchase a move-in-ready home or refinance their existing mortgage with a minimal down payment.

"This option is ideal for first-time homebuyers, borrowers with less-than-perfect credit or those with limited cash for a down payment," he said.

Meanwhile, FHA 203(k) loans are ideal for homebuyers or homeowners interested in purchasing or refinancing a property that requires repairs or renovation. Holman says this option is best for those looking to buy a "fixer-upper," homeowners wanting to make home improvements and buyers looking to customize a home before moving in.

Both types of loans can work for individuals who want to get into a home with a low down payment requirement and a credit score as low as 500 or 580. However, relatively low FHA loan limits for most of the United States mean these loans won't work for everyone.

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    FAQ

    What credit score do you need for an FHA loan?

    FHA loans require a minimum credit score of 500 if you can put down at least 10% of the purchase price of a home. If you have a credit score of at least 580, you can qualify with a down payment of 3.5%.

    Can you do the repairs yourself with an FHA 203(k) loan?

    FHA 203(k) loans require you to work with professional contractors on the renovations and updates planned. Lenders who approve these loans also send out their own 203(k) consultants to perform a home inspection, identify what needs to be improved and provide a cost estimate.

    Are FHA loans hard to get?

    FHA loans are known for their easy credit qualifications and low down payment requirements. These factors make FHA loans easier to qualify for than many other types of home loans.

    Bottom line

    When it comes to FHA loans, there are two main types you can consider. One is for the purchase or refinance of a property you're happy to move into as-is, whereas the other is for fixer-uppers that need renovations to become move-in ready.

    Both types of FHA loans have similar requirements, making them ideal for buyers with limited cash and less-than-perfect credit. If you want to purchase a home and can’t qualify for a conventional mortgage, FHA 203(b) and FHA 203(k) loans are worth considering.


    Article sources
    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. U.S. Department of Housing and Urban Development, "Let FHA Loans Help You." Accessed Feb. 29, 2024.
    2. Federal Deposit Insurance Corporation, "203(k) Rehabilitation Mortgage Insurance." Accessed Feb. 29, 2024.
    3. U.S. Department of Housing and Urban Development, "Basic Home Mortgage Loan 203(B)." Accessed Feb. 29, 2024.
    4. U.S. Department of Housing and Urban Development, "Maximum Mortgage Limits." Accessed Feb. 29, 2024.
    5. Consumer Financial Protection Bureau, "What is mortgage insurance and how does it work?" Accessed Feb. 29, 2024.
    6. U.S. Department of Housing and Urban Development, "Mortgagee Letter 10-29." Accessed Feb. 29, 2024.
    7. U.S. Department of Housing and Urban Development, "203(k) Rehabilitation Mortgage Insurance Program." Accessed Feb. 29, 2024.
    8. U.S. Department of Housing and Urban Development, "203(k) Rehabilitation Mortgage Insurance Program Types." Accessed Feb. 29, 2024.
    9. U.S. Department of Housing and Urban Development, "Section B. Property Ownership Requirements and Restrictions." Accessed Feb. 29, 2024.
    10. U.S. Department of Housing and Urban Development, "The Section 203(k) Loan Program." Accessed Feb. 29, 2024.
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