Finding financing for a new home can be difficult in today’s market, especially with qualification requirements becoming more strict and good credit harder to manage. If you are like many Americans struggling to finance a new home or refinance a current one, then an FHA loan may be the answer.
Types: FHA Loan – 203(b) Loan and 203(k) Loan
The Federal Housing Administration (FHA) insures certain loans against losses. This means that when a lender makes a mortgage loan to a borrower, the government will cover any losses that may occur due to potential problems with the loan being repaid.
While there are many types of FHA-backed loans available, two tend to be the most common. These are the 203(b) and the 203(k).
- FHA 203(b): The 203(b) is known widely as the “basic” FHA loan. It has more relaxed qualification guidelines than conventional loans because the government helps manage risk. These are often available with very small down payments (as low as 3.5%), making them very affordable.
- FHA 203(k): The 203(k) loan is like the 203(b) except that it also includes funds for home improvements, renovations, and repairs. The amount provided depends on the types of work needed and the type of loan given.
The Standard FHA 203(k) loan covers renovations of all kinds, whether they are significant structural repairs or minor remodels. The amount permitted for the loan is the home’s value plus $35,000.
Some borrowers may find the Streamlined loan to be more what they need, however. The Streamlined 203(k) allows minor funding for remodeling, including purely cosmetic renovations such as kitchen, bathroom, patio, deck, and siding. The amount permitted is limited to either the cost of the house plus renovation expenses or 110% of the home’s value, whichever is less.
How FHA Loans Can Help You
The U.S. Department of Housing and Urban Development covers losses for FHA loans. Because of this, the risk for lenders is significantly lower than with conventional loans, meaning they can offer loans with lower interest, more flexible terms, and less stringent qualification guidelines. These benefits can help you with any of the following down the road:
- Home Equity: Your home’s equity, or its value minus your current mortgage, can be used to help with future investments and expenses. One way to build equity is by improving the home, which can make an FHA 203(k) loan very useful.
- Refinance Mortgage: To refinance a mortgage, you replace a current mortgage with a new one at a better interest rate. For many, an FHA loan can provide better rates and lower monthly payments than a conventional mortgage.
- Cash Out Refinance: Sometimes, a bit of extra cash is good to have on hand. Cash out refinancing is like normal mortgage refinancing except that you also get a bit of extra money beyond what you owe on the mortgage. Unfortunately, cash out refinance on an FHA loan is not available in Texas. Even so, an FHA loan can help build credit in preparation for a conventional cash out loan.
The one drawback of FHA loans is they all require mortgage insurance payments, both upfront and on a monthly basis. This is to help cover possible losses to the lender.
FHA loans are designed to make it easier to buy or refinance a home by mitigating risks to the lender.
- FHA loans are backed by the government
- The lower risk to lenders allows them to approve people with lower credit or income
- FHA 203(b) is the basic FHA loan offered
- FHA 203(k) covers the cost of renovations and home improvements
- All FHA loans require upfront and monthly mortgage insurance payments
Why Choose Patty Newby
We have served residents in Frisco, TX, and elsewhere in Collin County for over a decade, and our high level of service and expertise allows us to find the best financing solution for your needs. Unlike most mortgage companies, we carefully examine your entire financial profile, including your income, credit, assets, and net worth. From there, we can find the best mortgage solution for your situation. For more information on how we can help you, call us today.
About Frisco, TX
Located in Collin and Denton Counties, Frisco, TX, is one of the fastest growing cities in the nation. Between 1990 and 2000, its population more than quadrupled in size, due largely to the suburban development in the Dallas-Fort Worth area. Frisco is home to a number of sports venues, such as the Dr. Pepper Ballpark and a new Cowboys center, which will include a luxury hotel, high-end training facilities, and a 12,000 seat indoor stadium.