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 attractive option for homebuyers looking to get more house for their money With home prices rising nationwide, buying a foreclosed property that is priced below market value can help you afford your dream home
But can you use an FHA loan to purchase a foreclosed property? The short answer is yes, you can buy a foreclosure with an FHA mortgage loan. However, there are some specific requirements and drawbacks to be aware of if you plan to use FHA financing on a foreclosed home.
What Is An FHA Loan?
FHA loans are government-backed mortgages insured by the Federal Housing Administration (FHA), part of the US. Department of Housing and Urban Development (HUD) These loans require a low down payment of just 3.5% and have flexible credit requirements compared to conventional loans.
The FHA insures lenders against loss, allowing them to offer mortgages to buyers who may not qualify for other types of financing. FHA loans can be a good option for first-time homebuyers, buyers with lower credit scores, or buyers with limited funds for a down payment.
Can You Buy A Foreclosure With An FHA Loan?
Yes, FHA loans can be used to purchase foreclosed homes, also known as real estate owned (REO) properties. However, there are some specific requirements:
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The property must meet FHA minimum property standards. FHA appraisers thoroughly inspect properties to ensure they are safe, sound, and habitable. Foreclosed homes often need repairs that would have to be addressed before closing.
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The buyer must plan to live in the home as their primary residence. FHA loans require owner-occupancy within 60 days of closing. You cannot use FHA financing to buy a foreclosure as an investment property.
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The purchase must align with FHA mortgage limits and underwriting guidelines. Like any FHA loan, factors like your credit score, income, and debt-to-income ratio will be evaluated.
While an FHA loan can be used, unique challenges come with buying foreclosures that you need to be prepared for.
Pros Of Using FHA Financing On A Foreclosure
1. Low Down Payment Options
FHA loans allow down payments as low as 3.5%. On a $200,000 home, that’s just $7,000 down compared to 5-20% on conventional loans. This helps buyers with limited cash purchase a foreclosure.
2. Flexible Credit Requirements
FHA loans are available to buyers with credit scores starting at 500 with a 10% down payment. Minimum scores as low as 580 are required with 3.5% down. Their credit standards help those with less-than-perfect credit buy a foreclosed property.
3. Potentially Lower Purchase Price
Since lenders want to unload foreclosures quickly, their listed sale prices are often well below market value. FHA financing allows buyers to capitalize on a bargain purchase price.
4. Access To Down Payment Assistance
Several down payment assistance programs can be combined with an FHA loan, providing grants, low-interest loans, or subsidies to help cover the down payment and closing costs.
5. Lower Monthly Mortgage Insurance
FHA loans require mortgage insurance no matter your down payment size. However, FHA mortgage insurance rates are lower than on conventional loans.
Cons Of Using FHA Financing On A Foreclosure
1. Strict Property Condition Requirements
While the FHA minimum property standards are meant to protect homebuyers, needed repairs could threaten your ability to use FHA financing if significant enough.
2. Loans Are Sold “As-Is”
You buy a foreclosure as-is, meaning the seller will not make any repairs or address problems. You must do any renovations out of pocket after closing.
3. High Upfront Mortgage Insurance Premium
FHA loans require a 1.75% upfront mortgage insurance premium paid at closing, adding thousands to your upfront costs. On a $200,000 loan that’s $3,500 due at closing.
4. Slower Processing And Closing Timelines
FHA loans take more time to approve and close than conventional mortgages in part due to the appraisal. This gives more time for bidding wars that can drive up the price.
5. Must Live In The Home As Your Primary Residence
Some buyers want to quickly renovate and flip a foreclosure or rent it out. But FHA guidelines prohibit this, requiring you to live there.
6. Difficult To Compete With Cash Buyers
Many real estate investors bid on foreclosures with all-cash offers, which sellers often prefer over financed offers. This can make buying a desirable foreclosed property fiercely competitive.
Can You Buy A Foreclosure That Doesn’t Meet FHA Standards?
If the foreclosure you want doesn’t meet the FHA minimum property standards for safety and livability, you may still be able to buy it using a different type of FHA-insured loan called a 203(k) rehab loan.
The FHA 203(k) loan allows homebuyers to roll the financing for purchase and renovations into a single mortgage. Here’s how it works:
- An FHA appraiser inspects the property and estimates the cost of needed repairs
- Loan funds cover both the as-is purchase price plus rehab costs
- Interest accrues on the full loan amount including rehab funds
- After closing, planned repairs must be completed within 6-12 months
- When finished, the appraiser re-inspects to ensure work was done properly
203(k) loans allow buyers to finance unlivable homes and do needed renovations after purchase. However, underwriting is more stringent and interest rates are typically higher. Rocket Mortgage® does not currently offer 203(k) loans.
Finding Foreclosures For Sale
Foreclosed homes can be listed for sale on:
- Real estate websites like Zillow, Trulia, Redfin
- Bank websites and local branch offices
- Auction sites like Hubzu
- HUDHomeStore.com – U.S. Department of Housing and Urban Development (HUD) listings
- HomePath.com – Fannie Mae real estate owned (REO) listings
- HomeSteps.com – Freddie Mac REO listings
Realtors can also search foreclosure listings on the multiple listing service (MLS).
The Bottom Line
Yes, FHA loans can be used to buy foreclosed homes, given their condition passes inspection and you plan to live there. While FHA financing provides a viable mortgage option, unique challenges exist when purchasing foreclosures that you need to be prepared for.
Thinking of buying a foreclosure with an FHA loan? Get pre-qualified to see your estimated rate and payment. With today’s low rates, you can maximize your purchasing power.
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?
What will disqualify an FHA loan?
Do sellers avoid FHA loans?
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.
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.