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.
Purchasing a foreclosed home can be a great way to get a good deal on a property. With home prices rising many buyers are looking into foreclosures as an affordable way to become homeowners. But can you use a Federal Housing Administration (FHA) loan to buy a foreclosed property? Let’s take a closer look.
What is a Foreclosed Home?
A foreclosed home is one that has been repossessed by the lender due to the previous owner defaulting on their mortgage. When a homeowner stops making payments, the lender can begin the foreclosure process to take back ownership and sell the home to recoup their losses.
Foreclosed properties are usually sold at below market value since the lenders want to get them off their books as quickly as possible. This makes them attractive to buyers looking for a bargain However, foreclosures are generally sold “as-is,” meaning the buyer takes on any repairs or issues with the property
Overview of FHA Loans
FHA loans are a popular option for first-time homebuyers and those with lower credit scores or incomes. These government-backed loans offer more flexible qualifying guidelines than conventional mortgages.
Some key features of FHA loans include:
- Down payments as low as 3.5%
- Lower credit score requirements – usually 580+
- Lower income thresholds
- Allows gifts from family for down payment
- Offers streamlined refinancing for existing FHA-loan borrowers
While FHA loans provide easier access to homeownership, they do come with some additional costs like mortgage insurance premiums and appraisal fees.
Can You Buy a Foreclosure With an FHA Loan?
Yes, you can purchase a foreclosed home using an FHA-insured mortgage, provided that:
- The property meets FHA appraisal and safety standards
- You plan to live in the home as your primary residence
- You meet all other FHA borrower eligibility criteria
The FHA will not insure loans for foreclosures that are in poor condition or fail to meet basic livability and safety requirements. An FHA appraiser must inspect the property and ensure it is habitable before approving it for financing.
As with any FHA purchase, you’ll need a minimum FICO credit score of 580, debt-to-income ratio typically below 50%, and at least 3.5% down payment. Gift funds and grants can be used for your down payment.
Pros of Using an FHA Loan for a Foreclosure
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Lower down payment: The 3.5% FHA down payment makes foreclosures more affordable, especially when compared to conventional loans that require at least 5% down.
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More flexible credit guidelines: FHA’s lenient credit standards give you a better chance of approval if your credit score is below 700.
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Lower purchase price: Since foreclosures are usually discounted, you get to buy the home for less than market value.
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Opportunity to build equity: As you pay down the mortgage, you’ll gain equity in the property over time.
Cons of Using an FHA Loan for a Foreclosure
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Must be livable condition: The property must pass an FHA appraisal verifying it’s safe, structurally sound, and habitable. Extensive repairs may disqualify the home.
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As-is purchase: You buy the home as-is, meaning you’re responsible for any repairs and can’t ask the seller to fix or replace anything.
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Competition from investors: Foreclosures attract real estate investors, often making all-cash offers that give them an edge over financing.
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Can’t use for investment: You must live in the home as your primary residence, not use it as a rental property.
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Additional costs: On top of the down payment, you’ll have upfront mortgage insurance premiums, appraisal fees, and closing costs to budget for.
Finding Foreclosures for Sale
Foreclosed homes are sold through auctions, real estate agents, and directly by lenders. Here are some places to find foreclosure listings:
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MLS (Multiple Listing Service) via a real estate agent
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Online sites like Zillow, Trulia, and Realtor.com
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Local foreclosure listings in newspapers and public records
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Bank websites and offices
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HUD Home Store for FHA-foreclosed properties
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Fannie Mae HomePath and Freddie Mac HomeSteps programs
A real estate agent can also set up custom searches to notify you of new foreclosure listings that match your criteria.
Using a 203(k) FHA Loan for Fixer-Uppers
If the foreclosure you want requires significant repairs to be livable, the FHA 203(k) loan can be an option. This program combines a mortgage with funds for renovating a home in need of rehabilitation.
With the 203(k) loan:
- Purchase price includes rehab costs
- Only one loan closing needed
- No need to move in until work is complete
- Wide range of eligible improvements
However, 203(k) loans are more complex and have stricter guidelines than a standard FHA mortgage. Not all lenders offer them.
The Bottom Line
Yes, it is possible to purchase a foreclosed home with an FHA loan, provided the property is in livable condition and you’ll use it as your primary residence. While FHA financing can help you buy a foreclosure, you’ll have competition from cash buyers. Also budget for repairs since you buy the home as-is. If major work is required, look into a 203(k) rehab loan.
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.
Pros And Cons Of Buying A Foreclosure With An FHA Loan
Using an FHA loan to buy a foreclosed home has advantages and disadvantages. Letâs take a look at some of the most common pros and cons of purchasing a foreclosed home with FHA funding.
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Pros |
Cons |
|---|---|
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The potential to get a good deal |
FHA property standards to meet |
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A low down payment |
The home being sold a -is |
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Flexible requirements |
Competition with investors |
FHA loans have a lower minimum credit score requirement than a conventional loan or a USDA loan, and the down payment requirement for an FHA loan is exceptionally low for such a low minimum credit score. Since foreclosed homes typically have a lower listing price than comparable homes for sale in the same area, an FHA foreclosure purchase gives some house hunters the chance to buy a home that may otherwise be outside of their budget.
The downside to buying a foreclosed home with an FHA loan is that the property must adhere to strict criteria. One of the most important factors is that the home is safe, and since foreclosed homes are sold as is, it could be harder to qualify for an FHA loan if the home isnât habitable. FHA 203(k) loans offer a way around this challenge, but the trade-off can be a higher interest rate.
Buying a foreclosure also comes with more competition since investors may be able to pay with cash, which is less risky for banks than an offer from an FHA borrower, who will need to take out a mortgage and repay a loan plus interest.
Even though FHA home loans are a relatively affordable finance option, itâs still essential to budget for closing costs and general home maintenance, too.
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 FHA loan after foreclosure?
Do sellers avoid FHA loans?
Can you sell a house you bought with FHA?
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.
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.
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.