how do lenders use an fha 203 k loan 
the federal housing administration fha was created in 1934 during the great depression which saw a high rate of foreclosures and defaults 4 the fha served to incentivize banks to give home loans to low and medium income earners individuals with low credit scores and first time homebuyers with no credit history this helped to stimulate the economy because people who would normally not be approved for a loan were issued mortgages the fha loan was created to insure these types of mortgages so that if a borrower defaults the fha will step in to cover the payments minimizing the lender s risk high income earners generally prefer to buy in newer and more developed areas of a city the fha introduced the 203 k loan specifically to encourage low income earners who do not qualify for a standard mortgage to choose to live in neglected neighborhoods and upgrade them 1getting an fha 203 k loanit is important to note that the fha is not a lender rather it is a mortgage insurer you get an fha 203 k loan by applying through your bank credit union or another lender not all lenders offer these loans to find an approved lender see hud s approved lender directory 5the fha is also not a home insurer or warranty provider homebuyers still need to purchase home insurance and warranties for their home and property pros and cons of fha 203 k loansas with other fha loans an individual can make a down payment of only 3 5 on a 203 k loan 6 because the loan is insured by the fha lenders may offer lower interest rates for a 203 k loan compared to what borrowers may be quoted elsewhere interest rates will vary for each borrower depending on their credit history however the fha 203 k loan is not without its costs an upfront mortgage insurance premium has to be paid every month by the borrower 7 a supplemental origination fee may also be charged by the lending institution in addition to the financial costs to the borrower the rigorous paperwork required and the lengthy time it takes to hear back from the fha and lender are factors to consider when applying for this program overall an individual with a low credit score seeking to own a home that may need to be fixed and modernized may decide that the fha 203 k has great benefits that outweigh its costs fha 203 k vs construction loansthough an fha 203 k loan is a type of fha construction loan it s possible to get construction loans outside of the fha program a construction loan is typically a short term loan that provides funding to cover the cost of building or rehabbing a home 8construction loans may have higher interest rates than conventional mortgage loans the money may be paid out in installments as construction gets underway and continues rather than as a lump sum the balance due on a construction loan may be paid in a lump sum at the end of the loan term alternatively homeowners may choose to convert a construction loan to a conventional mortgage 8if your lender doesn t allow for automatic conversion of a construction loan to a conventional mortgage you may need to apply for a brand new loan to avoid having to make one large balloon payment fha 203 k loan qualificationsif you re interested in an fha 203 k loan it s important to understand what you ll need to qualify the first step is finding an eligible lender if you haven t done so already 1 next you ll need to ensure that your purpose for getting the loan meets fha 203 k guidelines again these types of loans can cover if the property satisfies those guidelines you can move forward with the application process the qualification requirements for an fha 203 k loan are similar to the requirements for a regular fha loan in terms of credit score income down payment and loan limits that means you ll need a credit score of at least 580 to purchase a home with a down payment of 3 5 9 the typical score needed to get a standard mortgage is 620 though some lenders require a score as high as 740 it s possible to qualify for an fha 203 k loan with a credit score as low as 500 though that will require you to increase your down payment to 10 9