Buying a home that needs fixing up can seem near impossible if you do not have the cash to pay for the home outright. No FHA, conventional, VA, or USDA loan is going to fund a home that needs expansive repairs and will not pass a uniform appraisal, so where does that leave you? The FHA has created the 203K program for situations just like these. You can now purchase a home that does not pass a standard appraisal with loaned funds and even have enough money in the loan to fix the home up! The idea behind these loans is to help rundown areas to be renovated as so many homes became rundown and vacated after the housing crisis. The 203K loan enables you to have enough funds to not only bring the home up to code and livable, but it allows for plenty of cosmetic changes as well.
203K Credit Requirements
All loans have their own requirements and the 203K loan is no exception. The one thing that it has going for it, however, is that it is an FHA loan. This means that the requirements are lenient, just like a standard FHA loan. The credit scores that are required are lower and the other stipulations that render a loan approved or denied are more lenient as well. Typically, the FHA will not back a 203K loan that has a credit score lower than 580, but many lenders will not take the risk with a credit score that low. You can shop around if your credit score is within that range to see if you can find a lender willing to take the risk, but without any compensating factors, such as a low debt ratio, stable income, or plenty of reserves, it may be difficult to find. Generally, 203K lenders like the credit score to be around 620-640 in order to be a good risk, but there is no cut and dry answer as to what score a lender will provide.
Credit History Guidelines for 203K Renovation Loans
The FHA is much more forgiving when it comes to credit history than other loan programs, such as conventional loans. It is for this reason that people without a standard credit history often turn to FHA loans and the 203K loan is no exception. If you are just starting out in life and do not have traditional credit lines that report your financial responsibility, you can use alternative credit lines for the 203K loan. The FHA typically allows you to provide proof of payments over the last year from any of the following types of vendors:
- Insurance payments
- Rent payments
- Utility payments
- Cell phone payments
The lender will typically require at least 12 months’ worth of proof that payments for these trade lines were made on time in order for it to qualify for alternative credit.
As for any other credit history requirements, the 203K loan requirements are similar to those of the standard FHA loan. You need to have a clear housing history for at least the last 12 months, whether you are using traditional credit (credit report) or alternative credit trade lines. If you have any late housing payments in the last 12 months, you will have a much harder time qualifying for the mortgage than you would if your late payments were several years ago or even if they were within the last 12 months but were on a different type of trade line, such as revolving debt. The FHA looks at your debts in this order of importance:
- Housing
- Installment loans
- Revolving credit cards and loans
If you have any serious blemishes on your credit report, such as a bankruptcy or foreclosure, a certain amount of time will have to pass before you can apply for a 203K loan. Those guidelines are as follows:
- Bankruptcy – At least 24 months must have passed since the discharge (not the filing) of your bankruptcy if it was a Chapter 7. If you filed a Chapter 13 bankruptcy and are still making payments on it, you will have to provide proof of timely payments as well as seek the approval of the trustee of your bankruptcy in order to add another debt to your plate.
- Foreclosure – In most cases, a foreclosure must be completed for at least 36 months before you can jump back into a 203K loan. There are certain special circumstances that allow you to get one sooner. This typically occurs only in the event of a spontaneous loss of a job (company closed) or a serious illness that made it impossible to work.
- Collections – Some collections can be overlooked, such as medical debt collections, but any federal debts that you have outstanding cannot be overlooked. They are required to be paid or at least to have a payment agreement in place and active at the time of application for the loan.
The minimum credit score for the 203K loan is rather broad when you look at the whole picture. There is no way to say that you will or will not get a 203K loan if you have a credit score of, 620 for example. Your credit score might be good, but you may have delinquencies that the lender cannot overlook. Remember that you are dealing with the requirements of the FHA as well as the individual lender you have chosen to use. If the lender is not comfortable taking on the risk of your loan, it does not matter what the FHA thinks. Of course, in this situation you could shop around to find a lender that is willing to take on the risk you are providing. Remember to look at the entire credit picture that you paint before applying for a 203K loan to see what you can do to make things look better and more lucrative for a lender to want to approve your loan.