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If you’ve been shopping for a home, you’ve likely had to learn some new lingo. For instance, a 4/2 refers to a four-bedroom, two-bathroom house; the amount of time that a house has waited for buyers may be abbreviated DOM (days on market).

Shopping for a mortgage has its own linguistics — and the 7/6 ARM meaning can be inscrutable at first. The quickest definition: A 7/6 ARM is an adjustable-rate mortgage with an interest rate that remains fixed for seven years, before changing once every six months for the remainder of the loan term.

But who benefits from a 7/6 ARM, and what are its downsides? Good thing you asked — we’ve got answers below.

Explaining the 7/6 ARM

ARMs (adjustable-rate mortgages) are different from more common fixed-rate home loans because — you guessed it — their interest rate adjusts over time based on market conditions. However, the lender can’t just bounce the interest rate around willy-nilly. There are guidelines and, thankfully, caps in place. Here’s how it works:

Initial Fixed-Rate Period

As mentioned above, a 7/6 ARM has an initial fixed-rate period of seven full years. That’s what the “7” refers to — and what the number in place of the 7 refers to in other advertised ARMs. (For example, a 5/1 ARM has a five-year initial fixed interest rate; for the remainder of the loan, rates can be adjusted once per year.)

Because the interest rate will begin to adjust once the initial period is up, borrowers can often qualify for a lower interest rate during this initial fixed period than they otherwise would with a traditional fixed-rate mortgage (whose interest rate and monthly payments will be identical for the life of the loan).

Adjustment Period

The adjustment period is what begins once that initial fixed-rate period is over — so for a 30-year 7/6 ARM, the adjustment period lasts 23 years. (Most ARMs have 30-year terms; in fact, 30-year terms are the average mortgage term length among U.S. borrowers.)

During the adjustment period, the interest rate can be adjusted. For a 7/6 ARM specifically, adjustments can happen up to once every six months. That’s what the “6” refers to.

Interest-Rate Caps

Some good news for those who take out ARMs: Although rates can be adjusted (and, yes, go up if market conditions swing that way), there are built-in limits. For instance, you might see an adjusted-rate mortgage advertised the following way: 7/6 ARM 5/1/5. Don’t let the additional numbers scare you! They simply refer to the interest rate caps and floors.

In this example, the first “5” means 5.00% is the most your rate could rise or fall during the first adjustment, while the “1” caps how many percentage points it can rise and fall during each subsequent adjustment after that. Finally, the last “5” indicates that your loan’s rate won’t rise or fall more than 5.00% at any point over the lifetime of the loan. So, for instance, if your initial fixed rate was 6.00%, this cap means the rate will never be lower than 1.00% or higher than 11.00%.

Recommended: Mortgage Calculator

Pros and Cons of a 7/6 ARM

Now that you understand how a 7/6 ARM works, let’s talk about who it best works for — and when.

Advantages of a 7/6 ARM

The main benefit of an ARM is its lower initial interest rate — and 7/6 ARMs have one of the longest initial fixed-rate periods. While the rate may later shoot up by as much as 5.00% (or whatever your loan’s interest rate cap is), many people take out ARMs with the intention of using the lower interest rate to pay off the loan as quickly as possible — ideally before the adjustment period kicks in at all.

Disadvantages of a 7/6 ARM

The disadvantages of a 7/6 ARM are related to its benefits. While 7/6 arm rates initially may be low, rates may get much higher in the adjustment period. If you don’t successfully pay back the loan before it begins, you may find yourself with much higher monthly payments — and since it’s hard to predict what your financial circumstances will be seven years down the road, this can be a risky bet to make.

Qualifying for a 7/6 ARM

So, what does it take to successfully qualify for a 7/6 ARM? While each home loan lender has its own requirements as part of the mortgage process, there are some basic rules of thumb to be aware of.

Credit Score Requirements

For starters, most lenders have a credit score floor of 620 for ARMs. (If you can qualify for a government-backed type of mortgage, such as an FHA loan or VA loan, that credit score floor may be lower.)

However, your credit score isn’t the only factor lenders assess when qualifying you for a loan. They’ll also look into your income and verify your employment, as well as considering your debt-to-income ratio or DTI — the measure of how much of your gross income each month is already tied up in making loan payments. In most instances, you’ll need a DTI ratio of 50% or less to qualify for an ARM.

When to Consider a 7/6 ARM

Given the specific risks and benefits of a 7/6 ARM, in what circumstances do they work best?

Those who are confident they’ll be able to pay off the loan before the initial fixed-rate period elapses could be well served by the upfront interest savings of this type of loan. Additionally, those who plan to sell their home within that initial seven-year period may also get the benefits of lower interest rates without following through on the adjustable-rate period.

Finally, people who are betting on a rise in income over the initial seven-year period may also be confident enough to take out a 7/6 ARM — but given how much higher your monthly payments could go at that time, this is a gamble best made with a lot of forethought.

Alternatives to a 7/6 ARM

Those who are interested in a 7/6 ARM might also consider ARMs with other terms, such as a 5/1 ARM or a 10/6 ARM.

Fixed-rate mortgages are also an option — one that offers predictability in both interest rate and overall payment amount. Of course, that interest rate may not be as low as the initial fixed rate period of an ARM.

Recommended: Choosing a Mortgage Term

The Takeaway

A 7/6 ARM is an adjustable-rate mortgage with a seven-year-long fixed-interest-rate period, followed by an adjustment period where the rate can change every six months. ARMs can be risky for those who plan to keep the mortgage for its entire term, but for those who plan to sell their home or pay off the mortgage before the initial fixed-rate period elapses, they can be money-savers.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

How is the interest rate on a 7/6 ARM calculated?

The interest rate on a 7/6 ARM — like any mortgage loan — is calculated using a wide variety of factors, including market conditions, the federal interest rate, the creditworthiness of the borrower and more. However, with an adjustable-rate mortgage specifically, that rate can change over time (sometimes tracking specific market indices). For the best information on how your loan is calculated, talk directly with your mortgage lender.

What happens when the initial fixed-rate period ends?

When the initial fixed-rate period of an adjustable-rate mortgage ends, the rate begins to be, well, adjustable — which means it can be changed (within the confines of the rate caps, floors, and adjustment intervals listed in the loan agreement). For example, with a 7/6 ARM, after the initial seven-year fixed interest period, the rate can be adjusted once every six months for the remainder of the loan’s term.

Can I refinance a 7/6 ARM before the adjustment period?

Yes, you can refinance a 7/6 ARM — or most any ARM — before the initial fixed-rate period is over and the adjustment period begins. However, it’s important to consider that refinancing comes with its own costs (which, like initial closing costs, can easily rack up to 3% or more of the total home value), so factor in those expenses when deciding what makes the most financial sense for you.

Photo credit: iStock/Perawit Boonchu

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

SOHL-Q324-023

A blanket mortgage is a special type of real estate financing that can be helpful when someone wants to buy multiple properties at once. Developers, investors, and house flippers may find blanket loans beneficial.

Note: SoFi does not offer blanket mortgages at this time.

Here’s more about how they work and their pros and cons.

What Is a Blanket Mortgage?

A blanket loan is a single mortgage loan that uses more than one piece of residential or commercial real estate as collateral.

The borrower can sell one of the properties while keeping the rest under the loan. Then the mortgagor can sell a second property, a third one, and so forth while still keeping the financing intact for the loan’s entire term.

You may be able to negotiate a blanket mortgage that lets you buy, sell, or substitute properties with minimal angst.

Recommended: Investment Property Guide

How Does a Blanket Mortgage Work?

A developer, for example, may find a large lot to subdivide into smaller ones, creating a new housing subdivision, under a blanket loan financing structure.

As general contractors or families buy the individual lot or lots they want to build on, those lots could be released from the developer’s blanket mortgage, with unsold lots remaining under the blanket loan.

As another example, someone who buys fixer-uppers, renovates them, and sells them for a profit may buy several properties of interest and finance them with a blanket mortgage. Each property that is refurbished and sold can be released from the blanket mortgage loan.

If a blanket mortgage comes with a release clause, the proceeds from a property the borrower sells can be used to buy another property.

Lenders can create their own terms, so it’s important to be clear about a loan’s parameters. They will want to know about each of the properties involved, their intended use, where they’re located, and their condition. If a housing development is being planned, the lender will want proof of the borrower’s experience.

Recommended: How to Buy a Multifamily Property With No Money Down

Pros and Cons of a Blanket Mortgage

Each of the different types of mortgages comes with pros and cons. That’s true of a blanket mortgage, too.

Recommended: Home Loan Help Center

Should You Consider a Blanket Mortgage?

Possibly. If you’re qualified and you want to buy multiple properties with one mortgage, selling them and releasing them from the loan as they are individually sold, then a blanket loan may make sense.

Blanket mortgages can be elusive. If a blanket loan seems like a good choice, you can inquire about one with banks that offer commercial loans or talk to a mortgage broker.

Any lender or broker you contact should be able to answer your mortgage questions.

The Takeaway

Blanket mortgages are a specialty type of loan used by developers, real estate investors, and house flippers when they want to put multiple properties under a single loan. Blanket loans have pros and cons. Qualifying for one isn’t for the faint of heart.

FAQ

What is an example of a blanket mortgage?

If someone wants to buy fixer-upper homes to rehab and resell, they may use a blanket loan to purchase several of them at once. As a home gets refurbished and sold, that property is released from the blanket loan while the other properties are still funded.

Is it hard to get a blanket mortgage?

Lenders will typically want a borrower to have sizable assets and excellent credit, and the down payment can range from 25% to 50%. So blanket loans are limited to more established borrowers with solid financials.

Who would most likely obtain a blanket mortgage?

Businesses may apply for a blanket loan to buy commercial property. Landlords, both commercial and residential, may also utilize this type of loan. So can construction companies and people who flip homes.

Is a blanket loan a good idea?

Under certain circumstances, a blanket loan can be a useful form of financing. When purchasing multiple properties with one loan, just one approval is needed. Closing costs may be lower. Interest rates and payments may be more attractive, too. That said, requirements to qualify for this type of loan can be significant, with down payments ranging from 25% to 50%.

Photo credit: iStock/oatawa

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

Considering a condo? A condo could be a good choice as a starter home, a retirement nest, an investment property, or a residence for anyone who wants amenities but little maintenance.

You’ll want to weigh the upsides and potential downsides and take these steps before committing to a condo.

What Is a Condo?

When a person buys a condo, as opposed to buying into a co-op, they own the unit in the building or complex, but they don’t own anything outside those four walls. That includes the structure of the building, the roof, and the ground the building sits on.

The parts of the property not owned directly by the condo residents are managed by a homeowners association. The HOA maintains the property with fees collected from residents.

If you’re weighing a condo vs. townhouse, it helps to understand these key differences.

Recommended: Mortgage Prequalification vs Preapproval

What Are the Pros and Cons of Buying a Condo?

Ultimately, the choice to buy a house or condo will be based on the buyer’s preferences and budget.

Pros of buying a condo include:

•   Affordability. Generally, a condo will cost less than a detached single-family home so your monthly home loan payment may be more affordable.

•   Amenities. If it’s important to have access to a pool, gym, dog park, or parking garage, a condo might fit the bill.

•   Lower home insurance and property taxes. Because condo owners aren’t directly responsible for the exterior of the building, home insurance is less than for a single-family home.

•   Low maintenance. Beyond maintaining the immediate residence, condo owners don’t have to worry about mowing the lawn or replacing the roof on their own.

•   Lower utility bills. As condos are generally smaller than single-family homes, there are lower utility bills.

•   City settings. Condos are more likely to crop up in densely populated areas, making them an affordable entry point for owning property in an urban setting.

Is a particular condo within your means? Check out this home mortgage calculator.

There are plenty of upsides when someone buys a condo, but here are some downsides:

•   Privacy. Condos are shared residences with communal space. If buyers value privacy and their own outdoor space, a condo might not be a good fit.

•   Building rules. Condo boards dictate how a building is run, including if units can be rented, what colors can be used on exteriors, and whether pets are allowed.

•   HOA fees. Since maintaining the building is a collective responsibility, condo owners pay monthly or quarterly fees to the HOA. The fees are likely to rise every year. A sizable special assessment may be charged for major repairs.

•   Smaller space. Condos vary in size, but they’re unlikely to be as large as most single-family homes.

•   Slow appreciation. Condos tend to appreciate more slowly than single-family homes, but appreciation is also based on location and the market.

Things to Do Before Buying a Condo

Still not sure if a condo is the right fit? Before figuring out how to purchase a condo, consider these eight steps.

1. Consider Your Lifestyle

A condo could be a perfect fit for highly social people who prioritize proximity over privacy. Since condos tend to be smaller, the ideal condo owner should enjoy the communal offerings of the building, including everything from pools to pickleball.

As condos are often in cities, it could be the right fit if being close to the hustle and bustle is important to a buyer.

People who are downsizing often find a condo a good choice. Buyers who dread upkeep can own a home without mowing a lawn or maintaining a roof.

On the other hand, if a buyer values privacy and space, a condo might clash with their sensibilities. A condo won’t give them that opportunity if they want storage or a garden.

2. Work With an Agent Who Has Experience in Condos

Buying a condo with an agent specializing in single-family homes is like going to the dentist for an earache. Finding the right agent is about personality fit and experience. When interviewing agents, ask about what types of properties they buy and sell regularly. An agent with a lot of experience in condo sales will be more familiar with buildings in the area and their HOAs, amenities, and property management.

3. Consider the Pros and Cons

The perfect property doesn’t exist, so it’s worth weighing the pros and cons of condo living compared with a single-family home that’s not in an HOA community:

4. Decide What Type of Amenities You Want

If a condo feels like the right fit, it’s time to decide which amenities are musts and which are simply nice to have.

Amenities could include:

•   Pool

•   Dog park

•   Fitness center/spa

•   Tennis, pickleball, or basketball courts

•   Covered parking or parking garage

•   Business center/party rooms

•   Rooftop deck

•   Landscape management/gardens

•   Valet

•   Onsite programming or events

Once buyers understand what they need and what they don’t, they can more efficiently narrow down condos in the area based on amenities. Of course, the more amenities, the higher the maintenance fee will be.

5. Find an Approved Condo Community

Condo buyers who qualify for a Federal Housing Administration loan will need to find an FHA-approved condo community, one that meets requirements set by the U.S. Department of Housing and Urban Development. Buyers can search for these properties using HUD’s database.

Buyers wanting to use a VA loan can check a different database.

Most conventional mortgage lenders will require a “limited review” of most condominiums in the form of a questionnaire sent to the HOA. Among the criteria: Ten percent of HOA dues must be allocated to reserves, less than 15% of units must be in arrears with dues, and more than half the units must be owner-occupied.

Want to learn more about mortgages? Visit a help center for home loans.

6. Research the Property Management Company

Diving deep into property management is an important step of what to look for when buying a condo.

Before settling on a property, it’s important to research the property management company hired by the HOA to maintain the building. Consider double-checking on its licensing, reviews, and if there’s any ongoing litigation against the management company.

7. Review HOA Fees and Regulations

Hand in hand with researching the property management company is reviewing the HOA fees and regulations. HOA fees may be charged to condo owners monthly or quarterly, and range from a couple hundred a month to thousands. The fees could cover:

•   General upkeep and maintenance

•   Shared amenities

•   Some utilities

•   Security

•   Future upgrades

•   A master insurance policy to cover liability and repairs for common areas

If possible, request minutes from HOA meetings or inquire about recent hikes in fees. If the HOA doesn’t have much in reserves or is anticipating increases in fees, that can affect a buyer’s monthly housing budget.

In addition to researching fees, take a close look at the covenants, conditions, and restrictions, known as the CC&Rs. HOAs can impose regulations regarding:

•   Pets in the building

•   Renting out property

•   Use of common areas

•   Renovation or maintenance of owner units

Some HOAs have stricter regulations than others. For example, investors may want to avoid buying a unit in a building where rentals, or short-term rentals such as Airbnbs, aren’t allowed.

8. Ask About Special Assessments

Special assessments are one-time payments required of condo owners when reserves won’t cover a major expense. The HOA may require a special assessment if an elevator breaks or the roof unexpectedly begins leaking.

It’s a good idea for any condo hunter to ask when the last special assessment was collected. If there’s a history of frequent payments, it may be a sign of HOA mismanagement. Ideally, the HOA should have money set aside in case of an emergency.

If possible, ask the listing agent for the HOA’s financial statements to reveal how much the building has in reserves. If it’s low, there’s a chance of a special assessment in the future.

Recommended: Tips to Qualify for a Mortgage

The Takeaway

Condo living offers amenities, city living, and affordability. But buying a condo requires research. Working with the right agent and doing due diligence on the condo complex, its HOA, and its management company can help direct your home search.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

What should you avoid when buying a condo?

Red flags to look for when buying a condo include issues with the HOA and ongoing litigation with the property management company. Condo buyers would be smart to review the building’s financial records for reserve funds, lawsuits, and delinquencies.

Are condos hard to resell?

A condo that’s a good value for the current market and that is in a desirable area will likely not be hard to sell. In general, condos don’t appreciate as quickly as single-family homes, however.

Should you invest in condos?

Investing in condos will generally be less expensive than investing in single-family homes, but it’s worth examining the HOA bylaws to ensure that the condo can be rented out, and for how long at a time.

Photo credit: iStock/Sundry Photography

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

Deciding whether to pick a 15- or 30-year mortgage largely boils down to what kind of monthly payment you can afford and whether you need financial flexibility.

There’s a reason that the 30-year fixed-rate mortgage is most popular by far: Manageable payments that ideally allow room for other needs and wants.

But borrowers who can afford the higher monthly payments of 15-year mortgages, and who like the lower rate, may find them compelling.

How Does a 15-Year Mortgage Work?

Borrowers who opt for a 15-year mortgage when choosing a mortgage term will pay off their loan faster and save significantly more in interest over the life of the loan. (Here we are talking about fixed-rate home loans, not variable-rate ones; the latter can be useful in certain situations but are more complicated.) The main trade-off if you choose a 15-year loan is the fact that your monthly payment will be significantly higher than a comparable 30-year home loan.

Fifteen-year mortgages typically carry lower interest rates than 30-year mortgages. Consequently, the combination of a lower rate and compressed payoff time means a much lower interest cost overall.

A 15-year mortgage loan for $300,000 with a rate of 4.6% would result in $115,860 in interest paid. That same loan amount with a 30-year term at 5.8% would translate to about $333,700 in interest, a difference of $217,840.

The basic monthly payment, however, would be $2,310 vs. $1,760 in this example. Use an online mortgage calculator to compare home loans.

Lenders charge lower rates for 15-year mortgages because it costs them less to underwrite 15-year mortgages than 30-year loans. Generally speaking, the longer term a loan, the riskier it is to lenders, which they price into the loan through a higher interest rate.

Here are the main pros and cons of 15-year mortgages.

When to Consider a 15-Year Fixed-Rate Mortgage

You might want to consider a 15-year fixed-rate mortgage if you’re trying to pay off the loan faster, you want to save on total interest paid, want a lower rate, and can afford the higher monthly payments.

If you’re buying a home close to retirement and you’re interested in building generational wealth, a 15-year mortgage also is an attractive option as it ensures a faster payoff.

The 15-year mortgage is more frequently used for refinancing than buying, thanks to the lower rate and because most borrowers who choose to refinance are usually several years into their loan.

Consequently, borrowers who have longer-term mortgages with higher interest rates may want to consider refinancing to a 15-year home loan to save on interest costs. However, if you qualify as a first-time homebuyer or are already on a fairly tight budget, a 15-year mortgage might be more than your family finances can handle.

30-Year Mortgage vs. 15-Year Mortgage

Borrowers will find the payments on 30-year mortgages to be much more affordable than on 15-year mortgages. The longer the repayment term, the lower the monthly payment, potentially leaving more cash in your pocket every month.

Increased cash flow may allow borrowers to pursue other opportunities like preparing for retirement or shoring up emergency savings. Paying off higher-interest debt is also a good plan.

Homeowners may want to have enough cash to add or expand a home office, rev up the kitchen, and generally maintain the value of their home.

What about vacations and buying stuff? Yes and yes.

And some buyers will want to set up a college fund.

Like most things, 30-year home loans have upsides and downsides to consider.

When to Consider a 30-Year Fixed-Rate Mortgage

You may wish to consider a 30-year fixed-rate mortgage if you’re looking for the most affordable option when buying a home.

Fixed-rate 30-year home loans are the most straightforward and common type of mortgage loan on the market.

Given that home prices are relatively high and interest rates have not dropped substantially in recent years, 30-year home loans have started looking more attractive than other options. Despite the higher overall interest cost, the lower monthly payments on 30-year mortgages make it easier to afford a home.

Borrowers always have the option of paying off the mortgage early. Every extra principal payment reduces your overall loan balance and reduces the amount of interest that compounds over time as well.

The final thing to consider is that a 30-year mortgage provides a greater tax benefit than a shorter-term mortgage if you take the mortgage interest deduction.

Recommended: Mortgage Prequalification vs. Preapproval

Should You Choose a 15-Year or 30-Year Mortgage?

For many homebuyers, the choice of 15- vs. 30-year mortgage will not be voluntary: The monthly payments will force the decision.

If you are able to choose one or the other, you’ll want to consider whether you’re able to comfortably commit to a series of high monthly mortgage payments in exchange for the earlier loan payoff and interest savings, or whether any money left over monthly after making the relatively low mortgage payment on a 30-year loan could be put to other uses.

Your income level, career stability, and debt-to-income ratio may largely determine your course.

Recommended: Home Loan Help Center

The Takeaway

The decision on a 15- vs. 30-year mortgage depends on your personal budget and financial goals. If you can swing the shorter term, you’ll benefit from a lower interest rate, faster loan payoff, and substantial interest savings.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

Is a 30-year mortgage better than a 15-year mortgage?

A 30-year mortgage has lower monthly payments, but a 15-year loan will have less interest over the life of the mortgage. Which is better is a matter of personal choice and affordability.

Is it better to pay off my mortgage for a long period?

If your monthly budget is fairly tight or you have other debts you need to pay off, yes. You’ll pay a lot more in total interest with a long-term home loan than you would with a shorter-term one, but payments will be more affordable.

Can I pay off my 30-year mortgage in 15 years?

Yes, you can pay off the balance ahead of schedule but read your mortgage documents first: Some loans have a prepayment penalty.

Are the interest rates for a 30-year mortgage higher than a 15-year mortgage?

Yes, the interest rates for 30-year mortgages are typically higher than 15-year mortgages because of the extra risk of longer-term loans.

Photo credit: iStock/Tatomm

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

SOHL-Q324-040

Guaranteed by the Federal Housing Administration, FHA 203(b) and FHA 203(k) loans are both types of mortgages with more flexible credit and income requirements than conventional mortgages. While the FHA 203(b) loan is the flagship loan program for homebuyers, 203(k) loans can help you buy a fixer-upper in need of significant repair. A 203(k) loan can roll repair costs into the mortgage amount. Learn more about FHA 203(b) vs 203(k) and their key similarities and differences.

Note: SoFi does not offer FHA 203(b) or FHA 203(k) loans at this time.

FHA 203(b) Loans

Often simply referred to as FHA loans, FHA 203(b) loans are mortgages for homebuyers. Current homeowners can also use FHA 203(b) loans to refinance their home loan.

What Is an FHA 203(b) Loan?

FHA 203(b) loans are insured by the Federal Housing Administration and may be more accessible to borrowers with less-than-stellar credit or a high debt-to-income ratio than conventional mortgages.

There’s lots to learn about the basics of FHA loans, but here are some highlights: You can use one to purchase a single-family home or a property with up to four units. (FHA borrowers must make the property their primary residence for at least one year.) Whatever type of property you choose, it must pass the FHA’s appraisal and inspection standards. Basically, the home must be in good condition and not require major repairs or renovations.

FHA loans come with both upfront and annual mortgage insurance premiums. The upfront cost is 1.75% of your loan amount and is collected at closing. The annual costs vary depending on your loan-to-value ratio and other factors. You’ll pay MIP (mortgage insurance) for 11 years if your down payment is 10% or higher. If your down payment falls below 10%, you’ll pay MIP for the life of the loan.

Eligibility Requirements

While FHA 203(b) loans are insured by the Federal Housing Administration, you’ll have to apply for one through a participating lender, such as a bank or credit union. Here are the eligibility requirements borrowers must meet:

•   Credit score of 500 or higher: You can qualify with a credit score as low as 500 if your down payment is at least 10%. If your down payment is lower, you generally need a credit score of 580 or higher.

•   Down payment of at least 3.5%: You must provide a minimum down payment for an FHA loan of 3.5%, but a down payment of 10% or higher can mean a lower credit score requirement and fewer years of MIP payments.

•   Debt-to-income (DTI) ratio no higher than 43%: Your DTI compares your monthly debt obligations with your income.

•   Loan size that falls within FHA limits: The limits vary by property size but currently fall between $524,225 and $1,209,750 for one-unit properties.

Property Requirements

You won’t need an inspection to obtain an FHA loan, but before a lender can issue you an FHA 203(b) loan, an official appraiser needs to check that the property meets FHA standards for safety, security, and soundness. The appraiser will check out the interior and exterior of the home and look for features such as:

•   Functional home systems and appliances

•   A well-ventilated basement or crawl space

•   Working plumbing with hot and cold water

•   A roof with at least two years of life left

•   A durable foundation with sufficient drainage

The home must meet the FHA’s minimum property standards in order to be eligible for FHA loan financing. It should also adhere to FHA flipping rules, designed to prevent borrowers and lenders from falling prey to fraud.

Found a home that needs significant work? Then you might be better off with an FHA 203(k) loan.

FHA 203(k) Loans

The FHA 203(k) loan program is geared toward fixer-uppers that need major repairs. Here are the details of FHA 203(k) loans, including how they work and their eligibility requirements.

What Is an FHA 203(k) Loan?

FHA 203(k) loans help homebuyers finance the purchase of a home and the costs of its repairs in a single mortgage. There are two types: the limited 203(k) loan and the standard 203(k) loan.

The limited 203(k) loan lets you finance up to $35,000 in your mortgage for repairs and upgrades. The standard 203(k) loan doesn’t specify a maximum limit, but it’s designed for major repairs that will cost at least $5,000.

The total property value and cost of repairs, however, must still fall within the FHA’s maximum mortgage limits. Some projects that a 203(k) loan could cover include:

•   Fix water damage

•   Perform electrical repairs

•   Repair or replace major appliances

•   Repair termite or pest damage

•   Complete unfinished renovation projects

Eligibility Requirements

The eligibility requirements for an FHA 203(k) loan are similar to those of an FHA 203(b) loan. You’ll need a credit score of at least 500 or 580, depending on your down payment size, and a DTI ratio no higher than 43%. The minimum down payment requirement is 3.5% and the loan comes with upfront and annual MIP costs.

Property Requirements

If you apply for a 203(k) loan, an official appraiser will check out the property and gather details on its interior and exterior structure. The home must be in need of at least $5,000 in repairs to qualify for the standard 203(k) loan. You generally need to complete the work within six months.

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Comparing FHA 203(b) and FHA 203(k) Loans

In a survey of FHA 203(b) vs. 203(k) loans you’ll see lots of similarities. Both are insured by the FHA and have less strict credit and DTI requirements than conventional mortgages. Plus, they require only a 3.5% down payment, making them accessible to homebuyers with limited funds upfront.

However, 203(b) loans are meant to help you buy a turnkey house that is more or less move-in ready. The home must meet the FHA’s minimum property standards and not have any major structural issues or damage.

A 203(k) loan, on the other hand, can be used to finance a fixer-upper that needs work. This type of loan lets you roll the repair costs into the mortgage so you don’t have to pay for them out of pocket. However, you’ll need to finish the work within a certain time frame.

Deciding Between FHA 203(b) and FHA 203(k)

A 203(b) loan is the more common choice among FHA loans. It could be a good fit if you want to buy a home or invest in a property that’s in relatively good condition. An FHA 203(k) loan, meanwhile, could make sense if you’re looking to buy a home in need of repair. Keep in mind, though, that you’ll end up paying interest on any repair costs that you roll into the mortgage. Plus, FHA 203(k) loans can have slightly higher interest rates than their 203(b) counterparts.

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Applying for FHA 203(b) and FHA 203(k) Loans

If you’ve studied an FHA loan guide and think this type of loan is for you, you can apply for an FHA 203(b) or 203(k) loan with a lender that issues these types of loans. It’s a good idea to explore your options for both FHA loans and conventional mortgages to determine which type of financing would be most affordable for you.

Lender Requirements

The lender has to abide by Federal Housing Administration criteria, but they might set even higher requirements. Some companies, for example, will only consider potential FHA borrowers with a credit score of at least 580. It could be worth shopping around to find a lender with requirements that you can meet for credit score, DTI ratio, and other financial factors.

Required Documentation

As with any type of mortgage, you’ll need to provide a bunch of documentation to get an FHA loan. This may include:

•   Income tax returns

•   W-2s or 1099s

•   Pay stubs

•   Bank account statements

•   Investment account statements

•   Identification

The lender will also run a credit check to review your credit.

Application Process

You’ll need to fill out an application for your FHA loan with your personal and financial details, as well as information on the property and your down payment amount. After submitting the application, you’ll likely encounter the following steps:

•   Schedule an appraisal: An FHA-approved appraiser will evaluate the property and determine its market value.

•   Wait for loan underwriting: The lender will verify your information and process your loan. You may be asked to submit additional information or documentation during this time.

•   Close on your loan: Once everything goes through, you can close on your loan, provide your down payment, and move forward with purchasing your new home.

If you’re applying for an FHA 203k loan, you may need to work with a consultant, who will estimate repair costs for the home. Working with a licensed contractor who understands the 403k loan requirements may also be part of the process. Once the work is finished, the consultant will evaluate the project to ensure it meets FHA standards.

The Takeaway

FHA loans can be a useful financing option for homebuyers who may not be able to meet the credit and DTI ratio requirements for a conventional mortgage, though they do come with mortgage insurance premiums that can increase the cost of borrowing. A 203(b) loan can help you purchase a move-in ready home, while a 203(k) loan can be used to finance renovations and repairs.

FAQ

Can I use an FHA 203(k) loan for a new construction home?

FHA 203(k) loans can only be used for properties that are at least one year old.

Are there limits on the renovation costs for an FHA 203(k) loan?

With a limited FHA 203(k) loan, homebuyers can finance up to $35,000 in their home loan to repair their home. A standard 203(k) loan, on the other hand, can finance major rehabilitation and repairs as long as the costs are at least $5,000. The total cost of the loan and renovation cannot exceed the FHA Maximum Loan Limit which in 2025 is $524,225 for a single-family home in most places.

Are interest rates different for 203(b) and 203(k) loans?

FHA 203(k) loans typically have interest rates that are about 0.75% to 1.00% higher than standard FHA loans, according to The Mortgage Reports.

Photo credit: iStock/andresr

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