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.
Purchasing a foreclosed home can be an excellent way for first-time homebuyers or budget-conscious buyers to get a great deal on a property. With home prices high across the nation, buying a foreclosure for below market value makes homeownership more accessible. But can you use an FHA loan to buy a foreclosure? Let’s find out.
What Is a Foreclosure?
When a homeowner falls behind on their mortgage payments, the lender can begin the foreclosure process to take back the home. Foreclosure is when the bank or mortgage lender seizes the property from the borrower after they default on their loan.
Once the foreclosure process begins, the homeowner has some time to become current on payments or sell the home before the lender auctions it off. Homes sold through foreclosure auctions are called bank-owned or real estate owned (REO) properties. REO homes often sell for below market value since the lender wants to recoup their investment quickly.
What Is an FHA Loan?
An FHA loan is a government-backed mortgage insured by the Federal Housing Administration (FHA). These loans make homebuying easier for borrowers with lower credit scores or incomes.
Key features of FHA loans include:
- Low down payments, typically 3.5%
- More flexible credit requirements – minimum 580 FICO score
- Lower monthly mortgage insurance premiums (MIP)
- Access to gift funds for down payment
- Lower cash reserve requirements
FHA loans help make homeownership attainable for first-time buyers and buyers with less-than-perfect credit.
Can You Buy a Foreclosure With an FHA Loan?
Yes, you can buy a foreclosed home using an FHA-insured mortgage, provided that the property meets FHA lending guidelines. The home must pass an FHA appraisal showing it is safe, sanitary, and structurally sound.
While FHA loans allow lower credit scores and down payments, they do have eligibility requirements for borrowers and properties.
FHA Borrower Requirements
To qualify for an FHA loan to purchase a foreclosure borrowers must
- Have a minimum FICO credit score of 580
- Meet FHA debt-to-income ratio limits (typically under 43%)
- Make at least a 3.5% down payment
- Occupy the home as their primary residence
FHA Property Requirements
The foreclosed home must also meet these FHA criteria
- Appraised as safe and habitable by an FHA appraiser
- Meet FHA minimum property standards and home inspection requirements
- Be an owner-occupied single family home, condo, or townhouse (no investment properties)
If the property doesn’t meet livability standards, the buyer may need to utilize an FHA 203(k) rehab loan that covers purchase price plus renovations.
Pros of Using an FHA Loan for a Foreclosure Purchase
Buyers can enjoy several benefits when using an FHA loan to purchase a foreclosed property:
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Lower Down Payment: Only 3.5% down is required, making it easier to buy.
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Easier Credit: Minimum 580 FICO score allows more borrowers to qualify.
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Potential Savings: Foreclosures often sell for below market value.
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Less Cash Needed: Lower cash reserve requirements than conventional loans.
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Gift Funds Allowed: Can use gifts from family for down payment.
Cons of Using an FHA Loan for a Foreclosure
However, there are also some potential drawbacks to be aware of:
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Strict Requirements: Home must pass FHA appraisal and livability standards.
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Sold As-Is: No repairs will be done by seller; buyer responsible for all fixes.
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Stiff Competition: Investors often bid in cash, making FHA offers less attractive to sellers.
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Slower Process: More steps involved in FHA loan underwriting can extend time to close.
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Ongoing MIP: FHA loans require mortgage insurance for the life of the loan.
Finding FHA-Eligible Foreclosures for Sale
Foreclosed properties for sale can be found through:
- Real estate websites like Zillow and Realtor.com
- Multiple listing service (MLS) accessed via a real estate agent
- Local newspaper classifieds
Several government agencies also list foreclosed homes including:
- HUD Home Store – www.hudhomestore.com
- Fannie Mae HomePath – www.fanniemae.com/real-estate-owned
- Freddie Mac HomeSteps – www.freddiemac.com/realestateowned
Look for FHA-eligible foreclosures in your target locations. Then speak with a lender to get pre-approved for an FHA loan and make an offer when you find the right property.
Using an FHA 203(k) Loan to Buy and Renovate a Foreclosure
If the foreclosure you want doesn’t meet FHA health and safety requirements for an FHA purchase loan, the FHA 203(k) loan can help. This program combines purchase financing and funds for renovations into one FHA-insured mortgage.
With a 203(k) loan:
- Purchase price + renovation costs are rolled into one loan
- Only 3.5% down payment required
- Minimum FICO scores still just 580
- Work with FHA-approved contractors
- Loans up to $35,000 can have streamlined approval
203(k) loans allow buyers to purchase and renovate uninhabitable foreclosures to make them livable.
The Bottom Line
Yes, you can buy a foreclosed home with an FHA loan if the property meets eligibility guidelines. FHA loans provide flexible qualifying requirements to help more buyers purchase foreclosures sold below market value. However, FHA-backed mortgages also have stricter property standards that must be met.
Carefully review all FHA policies before making an offer on a foreclosed home. Consulting an experienced real estate agent and mortgage lender can help guide you through the process smoothly. With proper preparation, an FHA loan can help you achieve the dream of homeownership by purchasing a foreclosed property.
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?
Can a FHA loan be sold?
Can you use an FHA loan after buying a house?
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.
Can you close on a foreclosed home with an FHA loan?
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. The FHA also has several standards and inspection procedures you have to follow before you can close on the house.
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.
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.