Can You Buy A Foreclosed Home with A FHA Loan?
The Federal Housing Administration, or FHA, insures mortgage loans to help home buyers who may not be eligible for a conventional home loan due to less-than-perfect credit or lack of savings for a down payment. An FHA loan can be used to buy almost any type of home including modular, manufactured, or mobile homes -- and can also serve to purchase homes facing foreclosure.
Property Requirements for an FHA Loan
Although most homes qualify for FHA financing, the home you purchase must adhere to the FHA’s criteria for safety and habitability standards. Meeting these standards can help expedite the foreclosure purchase process. Property criteria for an FHA home loan include (but are not limited to):
Property must be used as a primary residence
Property must be appraised by an FHA-approved appraiser
Property must be inspected and meet minimum standards of habitability requirements
FHA Home Appraisal
To ensure the home meets FHA standards, the lender will order an appraisal. This appraisal ensures the home you are interested in complies with FHA requirements. The home buyer must cover the fee for the appraisal, which can cost anywhere between $300 and $500 (as stated by the Uniform Residential Appraisal Report or “URAR”) The appraisal will estimate the current market value of the home.
The FHA required appraisal is often confused with the home inspection. Unlike the appraiser who works for the lender and is solely interested in determining the value of the home based on set points of interest, the home inspector works for you and completes a more detailed job in not only inspecting the house from top to bottom, but creating a report that details any hazards, weak spots, and risks that the property may have.
This is particularly important when purchasing a home in foreclosure. Foreclosure properties can sometimes be worn down or found in various states of disrepair. On top of that, the “owners” are now lenders that have zero direct knowledge of defects, so they aren’t required to provide property disclosures that other sellers must share with buyers.
When buying a foreclosure with an FHA loan, repairs are typically the major challenge. Sellers must do the repairs necessary for making the house meet FHA standards according to FHA rules before closing. Due to foreclosures being sold as-is, you don’t have the option of asking the seller to make repairs. There is, however, one way around this: by purchasing an HUD-owned foreclosure. HUD houses usually meet FHA standards.
FHA 203(k) Rehab Loan
In some cases, the foreclosure you want to purchase may be in poor condition, and you’ll qualify for an FHA 203(K) rehab loan to purchase the home and perform repairs after your move-in date. The 203K credit standards are tougher than the regular FHA mortgage. The interest rate is also higher and you may be required to work with an FHA consultant or FHA certified contractors. On the positive side, you will have a larger range of foreclosures to choose from, and the opportunity to find the home of your dreams at a bargain price.
Real Estate Investors and Foreclosed Homes
Mortgage Investors love foreclosed homes because of the opportunity to renovate and sell the home for a higher price than purchase.
For those hoping to use a FHA loan option, borrowers may find increased difficulty competing with “all cash” investors or those that are able to offer the bank a significant down payment. Any given cash transaction for the bank makes for a lower risk and faster deal.