The FHA does not issue mortgage loans ― it insures loans for single-family and multifamily homes (new or existing), home repairs, and mortgage refinancing. The various FHA programs, commonly known as “FHA loans,” are issued by FHA-approved mortgage lenders (banks, brokers, etc.) and insured by the FHA.
Each type of FHA loan is different and must be applied for separately. FHA programs include fixed-rate mortgages (FRMs), adjustable-rate mortgages (ARMs), graduated payment mortgages (GPMs), and growing equity mortgages (GEMs), as well as more specialized loan types.
203(b) Home Loan
This is the most popular and basic FHA mortgage loan program. It comes with a fixed-rate and monthly payments scheduled over a term of 15 or 30 years. The minimum requirement for a down payment is 3.5%, meaning the homebuyer can finance up to 96.5% of their loan.
Additionally, this is the only loan that allows 100% of the closing costs to be a gift from a relative, non-profit organization, or government agency. The 203(k) loan is ideal for first-time homebuyers, but you don’t have to be one to qualify.
203(k) Rehabilitation Mortgage
First offered in 1979, this mortgage loan program allows you to both purchase and repair a home with a single mortgage loan. Otherwise, a homebuyer would have to get a mortgage first and then secure additional financing for repairs, which often comes with high interest rates.
With the 203(k) Rehab Mortgage, the homebuyer can work with an HUD-licensed consultant to gather estimates of the work that needs to be done. A “work write-up” is then submitted to a lender ― if approved, the cost of the repairs is folded into the FHA loan. (Note: Only certain FHA lenders are permitted issue this type of loan.) The mortgage loan amount is based on the home’s anticipated value once the repairs are finished (you may be able to borrow up to 110% of the property’s after-improved value). The money for repairs is held in an escrow account until all the work is done, at which point the home is appraised by an HUD-approved inspector and the funds are released.
There are several requirements for this type of home improvement loan ― the house must be owner-occupied (meaning you plan to live there once rehab is complete), there is a 3.5% minimum down payment, repairs must be at least $5,000 and work must begin within 30 days of closing the loan. 203(k) loans may have fixed or adjustable interest rates, and terms of 15 or 30 years. Keep in mind there is a lot of paperwork involved with this program.
Streamlined 203(k) Mortgage Loan
Commonly known as “Streamline (K),” this mortgage loan program allows homebuyers to purchase a home and finance minor repairs with a single loan. There is no minimum loan amount and the loan balance is allowed to exceed the home’s purchase price. However, borrowers are limited to a maximum of $35,000 for repair costs (which is wrapped into the mortgage). For loans with repair costs that exceed $15,000, the completed work must be inspected by a third party.
Streamline (K) mortgage loans may have fixed or adjustable interest rates. The property must be owner-occupied and cannot be vacant for over 30 days. Additionally, work must begin within 30 days of closing the loan and all repairs must be finished within 6 months.
The Streamline (K) is easier to obtain (than the 203(k) rehabilitation mortgage) ― it can be issued by all FHA-approved lenders and it involves less paperwork. However, the Streamline (K) has lower dollar limits for repair work and can only be used for minor home improvements (not for landscaping, room additions, or structural remodeling).