can you buy a foreclosure with an fha loan

Can You Buy A Foreclosure With An FHA Loan? (Answered)

Yes, you can. There’s nothing stopping you from purchasing a foreclosure with an FHA loan.

But because of the way that FHA loans work and the usual condition of foreclosures, you may need to do some additional work.

FHA loans require that properties be in good, habitable condition.

Foreclosures are frequently left in less than great shape.

What can you do to make sure your deal gets to the closing table?

Can You Buy a Foreclosure With an FHA Loan?

There are many ways in which purchasing a foreclosure with an FHA loan could be ideal. FHA loans are intended primarily for first-time homebuyers to purchase an affordable residential property with very little down.

If you have less than great credit or don’t have much saved for a down payment, an FHA loan could be the only way to go.

Meanwhile, foreclosures are generally priced much lower than comparable houses. First, they need a lot more work. Second, the bank wants to get rid of them.

Find the right foreclosure, and you could get an affordable property along with a flexible loan.

can you buy a foreclosure with an fha loan

What Are the Property Requirements for an FHA Loan?

For a property to qualify for an FHA loan, it must meet certain standards. These standards are meant to protect borrowers, by ensuring that the property is safe and habitable.

For an FHA loan, habitable condition means:

  • The property must have potable water and adequate electricity.
  • The property must have a working heating and cooling system.
  • The property must be free of major health and safety hazards.
  • The property cannot have any outstanding code violations.
  • The property must have a working kitchen.

It’s the last requirement that often trips people up. If the property doesn’t have a stove installed, for instance, it isn’t habitable. Additionally, if the property has roof or foundation issues, it won’t qualify.

Those are the requirements regarding habitability. There are also some other restrictions. The most significant will be the FHA loan limit based on your county, which outlines the maximum you can borrow in FHA financing.

What Happens if the Property Doesn’t Meet FHA Standards?

Unfortunately, if the property doesn’t meet these standards, you can’t purchase it with an FHA loan. Banks will generally make sure that a property is habitable. They don’t want to sell a broken-down property. But they aren’t going to invest a lot of money into a property that needs dire repairs.

piggy bank

The Pros of Buying a Foreclosed Home With an FHA Loan

Let’s say you find the perfect foreclosure. It’s in your price range and just needs a little bit of work. You can easily qualify for an FHA loan.

  • An FHA loan only requires 3.5% in down payment.
  • FHA loans are easier to qualify for.
  • A foreclosure is frequently a great deal.

In fact, you might even qualify for an FHA 203(k) repair loan; a loan that will give you money to repair the foreclosed property yourself.

The Cons of Buying a Foreclosed Home With an FHA Loan

Buying a foreclosed home with an FHA loan does require that the property goes through an inspection and an appraisal. If the foreclosure fails its inspection, repairs will need to be made by the bank before you can purchase the property.

Banks may be hesitant to accept an FHA loan offer if they have other offers because they know that an FHA loan will be more demanding and will take longer to close.

How Do You Apply for an FHA Loan for a Foreclosure?

The process for applying for an FHA loan is the same as with any other home purchase. You’ll need to find a lender and submit your financial information, including your income, debts, and credit score.

The lender will then issue a pre-approval letter. This letter will state how much money you’re eligible to borrow. Once you find a property you want to purchase, you’ll submit an offer to the bank.

If your offer is accepted, the property will undergo an FHA appraisal. The appraisal process for an FHA loan is really more an involved inspection. The appraisal will look for any major structural issues and confirm the property’s habitability.

Most foreclosed homes should pass this appraisal, as banks hire contractors to make sure their properties are in sellable condition. But some foreclosed homes experience significant damage before foreclosure.

If that’s the case, you might need to consider an FHA 203k loan.

house repairs

What If the House Needs Repairs? FHA 203(k) Loans

If the property you purchase needs repairs, you may be able to finance those repairs with an FHA 203(k) loan. This type of loan allows you to borrow money for both the purchase of the home and the repairs.

The 203(k) loan is a great way to get a single loan for a house that otherwise might not meet lending standards. But there are a few catches, too. The loan will take longer to close because you will need to outline the repairs necessary and the appraiser will need to both appraise the property value and assess the cost of repairs.

These loans are easy to qualify for but difficult to get. Like other FHA loans, the requirements for the borrower are fairly low, but the requirements for the property are more stringent.

How to Find a Foreclosed Home to Purchase

The best place to start your search for a foreclosed home is with the help of a real estate agent. Real estate professionals have access to foreclosure databases and can easily pull up the foreclosed properties in your area.

You can also find foreclosure listings online. There are many searchable databases of foreclosed homes, but the information presented may not be as accurate as what a real estate professional can provide.

A real estate agent can even pull information on pre-foreclosures; properties that are nearing foreclosure but haven’t been foreclosed on yet. Once a property has hit the market, you’ll have a lot more competition. Knowing about pre-foreclosures can give you an edge.

house hunting

Conclusion

Purchasing a foreclosure with an FHA home loan can be a great way to get a good deal on a property. Just be aware of the potential roadblocks and know what to expect. Work with an experienced agent who has closed on FHA loans before to help you navigate the process.

Alternatively, you can also use a conventional loan, VA loan, or FHA 203k loan to purchase the property. Your lender should be able to go over multiple mortgage products with you to determine the best loan for you.

Key takeaways:

  • Yes, you can purchase a foreclosure with an FHA loan.
  • You will need to make sure the foreclosure is in good condition.
  • If it’s not, you may need to consider an FHA 203(k) loan instead.

FAQs

Should you buy a foreclosure with an FHA loan?

If you find the perfect foreclosure that just needs a little bit of work, it could be a great opportunity. However, you will need to make sure that the property meets FHA standards.

What are the dangers of buying a foreclosure with an FHA loan?

If your property doesn’t meet FHA standards, you may waste a significant amount of time. You won’t know until it fails the inspection. Other than that, it’s not significantly different from purchasing any other type of property with an FHA loan.

How do you buy a foreclosure with an FHA loan?

You should get pre-approval for an FHA loan before you start looking. You can then run a search for bank-owned properties and make an offer. It’s up to the bank whether they are willing to accept the offer. If they receive a cash offer, an FHA loan may not be competitive.

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