Government-backed Federal Housing Administration (FHA) loans are available to those with low or non-existent cash reserves or credit score limitations. Foreclosures, not only homes for sale by owner, should be considered when looking for a house to buy since FHA loans also allow homebuyers to purchase properties in this category. This may enable potential homebuyers to discover the perfect house for them while paying a low mortgage amount.
With the recent FHA loan changes, now may be the best time to consider an FHA loan. Take the time now to learn more about the ways FHA loans can help you more easily acquire a home with the guide below.
Getting a Fresh Start with an FHA Loan on a Foreclosure
Purchasing a foreclosed home can be an excellent way for first-time homebuyers or those with past credit issues to become homeowners. While buying a foreclosure may seem risky, getting a Federal Housing Administration (FHA) insured loan can help make it possible. In this article, we’ll explore whether you can get an FHA loan for a foreclosure purchase, the benefits and drawbacks, and tips for finding and buying a foreclosed property with an FHA mortgage.
What is an FHA Loan?
An FHA loan is a government-backed mortgage insured by the Federal Housing Administration. Some key features of FHA loans include:
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Low down payments typically 3.5% of the purchase price.
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Lenient credit score requirements You may qualify with a credit score as low as 500 with 10% down
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Low monthly mortgage insurance premiums.
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Funds can be used to purchase or refinance a primary residence.
The low down payment options and flexible credit guidelines make FHA financing popular with first-time home buyers, low- and moderate-income borrowers, and those with past credit difficulties.
Can You Buy a Foreclosure with an FHA Loan?
Yes, FHA loans can be used to purchase foreclosed homes. When a previous homeowner defaults on their mortgage, the lender seizes the property through foreclosure. The bank then becomes the owner and sells the home to recover their losses.
Foreclosures are often sold below market value, providing opportunities for discounts. However, there are some specific requirements when using FHA financing:
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The property must pass FHA appraisal standards. The appraiser inspects the home to ensure it is habitable and meets minimum property requirements.
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You must live in the home as your primary residence. FHA loans can’t be used for investment properties or vacation homes.
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There may be additional competition from cash buyers. Investors often target foreclosures and make all-cash offers that can be more appealing to sellers.
Pros of Using an FHA Loan for a Foreclosure
There are several benefits to using FHA financing to purchase a foreclosed home:
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Low Down Payments – FHA allows down payments as low as 3.5%. This makes it easier for buyers on a budget to purchase a home.
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More Affordable – A foreclosure discount combined with low FHA rates can equal significant savings.
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Improve Credit – Making on-time mortgage payments can help improve your credit over time.
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Build Equity – You may gain equity as the property appreciates in value.
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Pride of Homeownership – For many, owning a home is an achievement that boosts their self-esteem.
Cons of Using an FHA Loan for a Foreclosure
While there are advantages, there are also some potential drawbacks to consider:
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Competition – Foreclosures attract investor interest. Cash offers may be more appealing to sellers than financing.
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Limited Supply – There are fewer foreclosures on the market than regular homes for sale.
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“As-is” Condition – Properties are sold in their current state. Any repairs are the responsibility of the buyer.
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Costs – In addition to the down payment, closing costs average 3-5% of the mortgage amount.
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Strict Guidelines – The home must pass FHA appraisal requirements to qualify for financing.
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Monthly Mortgage Insurance – This adds to the monthly payment and lasts for the life of the loan.
Tips for Finding FHA-Eligible Foreclosures
If you want to buy a foreclosure with an FHA loan, here are some tips to find eligible properties:
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Get pre-approved – This shows sellers you can obtain financing quickly. Being pre-approved also allows you to make offers as soon as you find a suitable home.
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Check listing sites – The Multiple Listing Service (MLS), Zillow, realtor.com, and auction sites like Hubzu allow you to search for foreclosures in your area.
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Contact lenders – Many banks have their own inventory of foreclosed homes they’ve repossessed.
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Drive neighborhoods – Look for signs of vacant, neglected properties that may not be listed online yet.
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Hire a buyer’s agent – An experienced real estate agent can help you identify and negotiate the purchase of a foreclosure property.
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Consider government-backed options – HUD, Fannie Mae, and Freddie Mac sell foreclosed homes they’ve acquired.
What to Look for in a Foreclosure Property
When viewing potential foreclosures, look for:
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Location – Neighborhood factors like school districts will affect value and resale.
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Property condition – Look past cosmetic flaws to structural integrity and major systems.
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Cost of repairs – Get an estimate to negotiate the purchase price accordingly.
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Market value – Research prices of comparable homes to identify good deals.
Pros and Cons of Buying Foreclosures With an FHA Loan
Before deciding to go ahead with buying a foreclosure with an FHA loan, potential homebuyers and borrowers should be aware of both the advantages and disadvantages of this process. The most important ones that every borrower should consider are outlined below.
Pros:
- Lower Down Payment: The smaller down payment needed to buy a foreclosure with an FHA loan can be as low as 3.5%, making it an incredibly attractive option for borrowers with poor credit.
- Easier Credit Requirements: The low credit score of 580 allows borrowers with a small or nonexistent credit score to qualify for an FHA mortgage that they may not have otherwise qualified for.
- Easier Qualifications: Borrowers looking to buy their first home or just starting out may find FHA loans provide a real pathway to becoming a homeowner.
Cons:
- Property is sold as is: Foreclosed properties are sold in the exact condition that borrowers first view them as. This means that the mortgage lender – the owner of the property – will not repair or otherwise fix the property in any way. The borrower will instead be the one responsible for performing any repairs, maintenance, or service the property in addition to planned home remodels.
- The livability standard: All foreclosures must pass the FHAs livability standard in the form of an appraisal, ensuring that the home meets the Department of Housing and Urban Developments (HUD) minimum property standards.
- High competition: The lower price attached to foreclosed properties means that many others will also be looking to buy the home the borrower may be interested in. Most of the competing offers will be in the form of cash, making them more appealing to the lender than deals involving large amounts of financing (such as the case with FHA loans).
- Slow sales process: The long qualification process paired with the list of eligibility requirements makes successfully processing FHA loans a drawn-out endeavor from the application phase to the final closing.
What are the Requirements for an FHA loan?
There are a handful of FHA requirements that borrowers will need to meet before the purchase of a foreclosed home can proceed. These requirements include:
Borrower Requirements:
- Credit Score/Status: Your credit score must be 580 or higher to qualify for an FHA loan. If the borrower has this score, they will be eligible for an FHA loan with a 3.5% down payment if all the FHA loan criteria are met. However, borrowers with credit scores as low as 500 can still receive FHA loans, but they may be required to pay an additional 10% down payment depending on the lender if the credit score does not improve.
- Ability to Repay: Borrowers must have the ability to repay the FHA loans monthly payments. Lenders will ask that the borrower send in personal information like ID and proof that they have a stable job with a debt-to-income ratio typically less than 45%, although the exact percentage may differ based on each borrowers unique financial situation.
- Down Payment: The down payment that every borrower will need to make to qualify for an FHA loan is at least 3.5%, but this may rise to 10% at the most depending on the credit status. Different down payment options exist to more easily pay for this amount, including having the required cash on hand, qualifying for a down payment assistance program, or receiving a gift of a down payment.
- Mortgage Insurance Payments: Borrowers must pay the upfront and monthly mortgage insurance premiums (MIP), then they must continue paying the insurance payments for the life of the loan. Every borrower should use an FHA mortgage calculator to determine if applying for this loan type is right.
All lenders require their own qualifications for approval.
Property Requirements:
- Primary Residence/Owner-Occupied: The property in question must be used as the borrowers primary residence. If the borrower already owns a home that they use as their primary residence, an FHA loan cannot be used for the borrowers new property. An FHA loan cannot be used for investing in properties like rental properties.
- Minimum Home Inspection Standards: The borrower must ensure that the property theyre purchasing meets the minimum home inspection standards for both safety and habitability in order to qualify for the FHA loan. Fixer-upper homes will usually not be approved for standard FHA loans. However, ‘fixer-upper homes’ may be allowed under the FHA 203(k) program. Talk to your Loan Officer to see if this may be a viable option for you.
- Appraisal: An FHA-approved appraiser must appraise the property so the lender may know that the property successfully meets the minimum FHA loan requirements and local building codes while establishing the homes fair market value.
Can I Buy a Foreclosure With An FHA Loan?
FAQ
How long after foreclosure can you get an FHA loan?
Can you use an FHA loan to buy a house at auction?
Can a home seller refuse a FHA loan?
Can you use an FHA loan after buying a house?