Federal Housing Administration loans, or FHA loans for short, are government-backed loans overseen by the U.S. Department of Housing and Urban Development (HUD). FHA loans are available to borrowers with a less-than-ideal credit score and not a lot of cash on hand, and these loans give home buyers on a tight budget a chance to become homeowners by using a more affordable financing option than the more common conventional loan.
FHA loans are intended for owner-occupant properties, not investment properties, but what about bank-owned or foreclosed properties? Letâs explore how you can buy a foreclosed home with an FHA loan, and weâll also weigh the pros and cons of doing so.
Buying a foreclosed home can be an affordable way to achieve homeownership, especially for first-time homebuyers on a budget. But can you use an FHA loan to purchase a foreclosed property? The short answer is yes, you can get FHA financing to buy a foreclosure – but there are important requirements and limitations borrowers should understand first.
In this comprehensive guide, we’ll cover everything you need to know about using an FHA mortgage to purchase a foreclosed home.
What is an FHA Loan?
FHA loans are government-insured mortgages backed by the Federal Housing Administration (FHA). Key features include:
- Low down payments – Just 3.5% required
- Lenient credit standards – Minimum 580 FICO score
- Low monthly mortgage insurance
- Available for primary residences
FHA loans help make homeownership attainable for borrowers who may not qualify for conventional mortgages. The program encourages lending to low- and moderate-income buyers.
Can You Buy a Foreclosure With an FHA Loan?
Yes, FHA loans can be used to purchase foreclosed homes. However, there are special requirements and risks borrowers should consider:
Property Condition
The home must pass FHA appraisal standards. Foreclosures are sold “as-is” – repairs cannot be required by the lender. If the property is not habitable, renovations may be needed using an FHA 203(k) rehab loan.
Down Payment Funds
You’ll need at least 35% of the purchase price for the down payment Closing costs and prepaids are also required,
Owner Occupancy
You must move into the home as your primary residence within 60 days of closing. Non-owner occupancy and investment properties do not qualify.
Competition
FHA offers may lose out to cash buyers who can close quicker. Discuss this risk with your real estate agent.
Slower Processing
FHA loans require appraisals and extra documentation. Expect a 45-60+ day closing timeline.
Pros of Using an FHA Loan for a Foreclosure
Below are some of the biggest advantages of using FHA financing to purchase foreclosed homes:
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Lower down payment – FHA requires just 3.5% down, making it more affordable.
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Easier to qualify – Minimum 580 FICO credit score. More options for lower income buyers.
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Low mortgage insurance – As low as 0.45% of the loan amount annually.
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Discount pricing – Foreclosures are often sold below market value.
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Fixed rates – Lock in a low rate on a 10, 15, 20, or 30 year FHA loan.
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 property standards – Foreclosed homes must meet FHA lending standards.
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Not as competitive – Cash offers will likely be viewed more favorably by sellers.
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Slower process – FHA loans require more documentation and appraisal.
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As-is condition – Lender won’t require repairs by the seller.
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Arm’s length terms – No special financing terms can be offered.
FHA 203(k) Renovation Loans
If the foreclosure you want to buy needs repairs to be habitable, consider an FHA 203(k) loan. These allow you to finance purchase and renovations into one mortgage:
- Repair costs are added to the mortgage
- One loan, one monthly payment
- Renovations can be done after closing
- Up to 35% of home value can be borrowed for repairs
203(k) loans have higher rates and costs but provide flexibility when buying distressed properties.
Where to Find Foreclosures for Sale
Foreclosed homes are sold at different stages of the foreclosure process. Here are some places to find foreclosure listings:
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Local real estate websites like Zillow, Realtor.com, etc.
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Auction sites like Hubzu.com and Auction.com
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Classified listing sites such as Craigslist
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Bank REO (real estate owned) departments
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Local newspaper classifieds – print and online
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Foreclosure search tools like foreclosure.com
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HUD auction site: HUDHomeStore.com
Tips for Buying a Foreclosure with FHA
Follow these tips when using an FHA loan to purchase a foreclosed property:
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Get pre-approved – Confirm you meet FHA requirements
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Act fast – Move quickly once you find a property
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Examine carefully – Inspect for defects that may impact financing
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Prepare for repairs – Budget for immediate repairs if needed
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Shop around – Compare mortgage rates and fees from multiple FHA lenders
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Hire a buyer’s agent – They can guide you through the process
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Be ready to negotiate – Foreclosures often sell below listing price
The Bottom Line
Yes, FHA loans can absolutely be used to purchase foreclosed homes, providing an affordable financing option. However, borrowers should understand the property conditions, down payment funds, and other requirements needed. An FHA 203(k) renovation loan is also an option if repairs are needed. But arm yourself with patience, as the FHA purchase process can be slow.
With the right preparation and persistence, an FHA loan can help you achieve homeownership by purchasing a foreclosed property at a discount. Consult with a lender and real estate agent to get started!
FHA 203(k) Rehab Loan
In some cases, if the foreclosure doesnât meet the livability standards and is more of a fixer-upper, the FHA will offer whatâs known as an FHA 203(k) rehab loan.
A rehab loan rolls the cost of renovations or upgrades into the overall price and allows borrowers to repay their lender for both repairs and the home loan in one monthly mortgage payment. Borrowers also donât have to live in the house until the renovations are completed. The program requires an appraiser to assess the cost of repairs and then, once repairs are completed, the value of the home.
A 203(k) loan has different requirements and often a higher interest rate than a traditional FHA loan, and not all lenders offer 203(k) loans.
Can You Buy A Foreclosure With An FHA Loan?
Although you can buy a foreclosed home with an FHA mortgage, the home must be habitable and meet all FHA guidelines for you to make the purchase.
A foreclosed home is a property that a bank or mortgage lender seized from its previous owner because this person defaulted on mortgage payments or otherwise broke the terms of the loan agreement. These homes tend to sell for less than market value and can therefore be a potentially good deal for a home buyer.
While FHA loans can give first-time home buyers and others the chance to find a great home even if they lack a super-great financial profile, FHA loans have certain standards and steps that make them different from other types of home loans, and these guidelines can make purchasing bank-owned and foreclosed homes more difficult.
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?
Where can I buy a foreclosed home?
You can purchase foreclosed properties at various points in the foreclosure process, including pre-foreclosure as well as during a short sale or at an auction. Sometimes, you can even buy a foreclosed home directly from a federal agency.
Can you buy a foreclosed home with an FHA loan?
In many cases, you can use an FHA loan to buy a foreclosed home. However, there will be a lot of things to keep in mind, such as whether the condition of the foreclosed home can pass the FHA’s pre-purchase inspection. In this guide, we’ll answer some of the most common questions you might have about buying a foreclosed home with an FHA loan.
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.