Are you considering buying a foreclosed home? Wondering if it’s possible with an FHA loan? If so, you’re in the right place!
Buying a foreclosed home can be financially beneficial because it may allow you to purchase a home at a lower price. Additionally, if you buy a home that needs work and then rehabilitate it, you can increase its value and build equity quickly.
That being said, it’s important that you’re aware of the FHA loan guidelines that apply to foreclosed homes. Below, we’ve provided some information that we hope will be useful to your endeavors.
Buying a foreclosed home can be an excellent way to get a great deal on a property. With home prices often discounted below market value, foreclosures offer an affordable path to homeownership, especially for first-time homebuyers. But can you purchase a foreclosed property using an FHA loan? Let’s take a look.
What is an FHA Loan?
FHA loans are government-backed mortgages insured by the Federal Housing Administration (FHA). These loans help make financing more accessible for borrowers by having
- Low down payments – only 3.5% is required
- More flexible credit score requirements – minimum 580 FICO score
- Lower cash reserve standards
In addition, FHA loans can be used to purchase or refinance a primary residence like a single-family home, townhouse, or condo. Investment properties do not qualify.
Buying a Foreclosure with an FHA Loan
Yes, you can use an FHA loan to buy a foreclosed home The property must meet certain criteria, however
Property Requirements
For an FHA loan. the home must
- Be appraised by an FHA-approved appraiser to ensure it meets FHA property standards
- Pass a home inspection confirming the property is habitable and safe
- Be used as your primary residence where you’ll live within 60 days of closing
FHA loans can only be used to purchase homes in livable condition that pass inspection. Distressed properties often have deferred maintenance and may not meet guidelines.
Borrower Requirements
As the buyer, you’ll need:
- A minimum FICO credit score of 580
- A debt-to-income ratio typically below 57%
- Sufficient income and employment history
- The funds for a 3.5% down payment
Meeting these requirements helps ensure you’ll be able to repay the mortgage.
Pros and Cons of an FHA Foreclosure Purchase
Buying a foreclosure with an FHA loan has several potential benefits but also some drawbacks to consider:
Pros
- Lower down payment allows more buyers to qualify
- Easier to buy with less-than-perfect credit
- Foreclosures are often discounted below market value
- Potential to negotiate a good deal with bank
Cons
- Homes are sold “as-is” with no repairs by seller
- Can be difficult finding a property that meets FHA guidelines
- Appraisal may come in lower than purchase price
- Competing bids from cash investors
While FHA loans provide a viable financing option, foreclosed homes in poor condition may be hard to purchase. Cash offers also often look most attractive to sellers.
Alternatives for Fixer-Uppers
What if you find a distressed property that doesn’t meet FHA criteria due to needed repairs? You may still have options:
- FHA 203(k) Loan – Combines purchase price plus rehab costs into one mortgage
- FHA 204(k) Loan – Finance only repairs on FHA-insured property
- HomeStyle Renovation Loan – Conventional rehab loan requiring 5% down
These programs allow you to finance home purchases that need work. However, they come with added costs, requirements, and restrictions.
Finding Foreclosures for Sale
Where can you find foreclosed properties on the market? Check these resources:
- MLS listings through a real estate agent
- Auction sites like Hubzu and Auction.com
- Bank websites and offices
- HUD Home Store
- Fannie Mae HomePath
- Freddie Mac HomeSteps
View current listings in your target areas. Drive by promising homes to evaluate condition before touring inside.
Buying a Foreclosure – The Bottom Line
Foreclosures can be purchased with an FHA loan, providing a low down payment path to homeownership. However, homes must meet FHA criteria for safety and livability. Fixer-uppers that don’t qualify may be possible with a rehab loan. Just know that stiff competition from investors is common when bidding on discounted properties.
With careful research, realistic expectations, and perseverance, buying a foreclosed home with an FHA loan can help you land the home of your dreams at an affordable price. Consult with lenders to discuss programs and pre-approval as you embark on your search.
Can I Use an FHA Loan to Buy a Foreclosed Home?
Yes! You can buy a foreclosed home with an FHA loan, so long as the property meets the FHA’s requirements. This means it must be in livable condition according to the HUD’s minimum property standards. It must also be able to pass an FHA appraisal.
If the property you want to buy needs major repairs, you may have to take an alternative route. Instead of getting a standard FHA loan, you may need an FHA 203k loan. These loans can be used to fund the purchase of the home as well as the repairs.
FHA loan requirements apply to more than the property itself. You, as the buyer, must also be eligible for an FHA loan. That means in addition to purchasing a property that’s in livable condition (unless you’re applying for an FHA 203k loan), you must also be able to meet other FHA loan guidelines such as:
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- Credit requirements: You will need to have a credit score of at least 500 to qualify.
- Down payment: You will most likely need to be able to put some money down towards your home purchase. The FHA requires a downpayment of 3.5% for borrowers with credit scores of 580 and higher. If your credit score is lower than that, you may need to put as much as 10% down.
- FHA mortgage insurance: You’ll have to pay for FHA mortgage insurance, also known as an FHA mortgage insurance premium (MIP). This fee is charged in order to protect the lender’s financial interests.
- Income requirements: You must also meet the guidelines for FHA income requirements. This means you need to have a steady income and a good employment history. Additionally, your debt-to-income ratio cannot exceed 43%.
Can I Buy a Foreclosure With An FHA Loan?
FAQ
Can you use an FHA loan to buy a house at auction?
What is the waiting period for a foreclosure on a FHA loan?
Do sellers avoid FHA loans?
Can you sell a house you bought with FHA?
Can I buy a foreclosed home with an FHA loan?
To buy a foreclosed home with an FHA loan, you must meet certain criteria, including property and credit requirements. A borrower who purchases a foreclosed property with an FHA loan also must move into the home within 60 days of signing their loan and treat the home as their primary residence.
Where can I buy a house if I have a foreclosure?
The HUD Home Store, Fannie Mae’s HomePath program and Freddie Mac’s HomeSteps program are other websites with foreclosure properties for sale. An FHA loan can be used to finance a foreclosed home purchase.
Can you buy a home with an FHA loan?
Established after the Great Depression, the FHA offers a variety of programs to help people acquire properties that might otherwise be out of reach. In some cases, you might be able to purchase a home via an FHA-backed loan with a grant to cover any money required for a down payment. In many cases, you can use an FHA loan to buy a foreclosed home.
What is the difference between an FHA loan and a foreclosed home?
Foreclosed homes are properties seized by banks or lenders due to unpaid mortgage payments and sold at a discounted price. On the other hand, FHA loans are mortgages insured by the Federal Housing Administration that allow first-time homebuyers to put down a lower down payment, have lower credit score requirements, and enjoy lower interest rates.