Wondering if buying a foreclosed home with FHA loan money is possible? The short answer is: it depends.
Full disclosure: I am about to give you the full answer but before I do that I must let you know that Home Loan Mine, not being a hobby, uses affiliate links. If you buy or register for anything through one of these links, I get paid a small commission.
It depends when in the stage of foreclosure you’re buying it and on the condition of the home.
You buy a home before it goes into foreclosure (a short sale) or after the foreclosure (at auction or once it’s been taken over by the bank or the Government agency that backed the loan).
The property must meet FHA’s standards. You can find FHA’s rules about the property online (FHA Single Family Housing Policy Handbook (PDF format is easier, I think to get through). You are looking for Minimum Property Requirements and Minimum Property Standards.
If your question is:
Can I Buy A Foreclosed House At Auction With An FHA Loan?
Then, the answer is yes, in theory.
Why in theory? Because auction sales are different than other sales. At auctions, you have to give a large amount of money right on the spot or within a few days. A large amount of money is, usually, usually 10-20% of the bid.
In addition, at auctions, they want you to bring the rest of the money in a short period of time, usually 30 days or less.
Though FHA loans can close in 30 days or less, it is not always the case. One of the most common reasons why not is the appraisal. If the property does not meet FHA standards, the appraiser conditions the value on someone fixing the problem.
Even if you can fix it (and that is doubtful), doing so takes time. Then the appraiser will take a couple of days or more to send an update to the lender. The lender will take a couple of days or more to review and approve the updated appraisal form.
In addition, sometimes, bidders do not get to see the interior of houses sold at auction.
Can I Buy A House At Auction With An VA Loan or A USDA Loan?
Same answer as for purchasing a house at auction with an FHA loan.
And the same answer goes for conventional loans. (It is true, though, that the number of foreclosed houses that meet your typical conventional mortgage loan is larger.) Things like a cracked window pane or peeling paint on the porch handrail will not stop the process. As a matter of fact, most lenders will give you a conventional loan on a property as long as the property’s condition is rated at least 4 out of 6.
So, When Can You Purchase A Foreclosure With An FHA Loan?
Once banks or the Government take over the property, you can purchase it with many type of loans. Just like buying it at an auction.
Except that now, time is not working against you as hard. You can set a mortgage contingency and closing day far enough that you don’t risk of losing your down payment.
When you’re buying REO (bank-owned homes) or Government-owned homes you’re going to have a bit of a different time then when you buy them from private sellers. That is true whether you are using an FHA loan or not.
Banks or the Government are not your typically motivated seller. That means you cannot count on them to negotiate the same way or, for that matter, to negotiate at all.
It also means that they use different purchase agreements and addenda. Not only that, but they have more of them.
When buying REO or Government-owned homes with an FHA loan, you have to pay the same attention you pay to houses you could buy from private sellers. I mean, the FHA property conditions remain the same; the FHA appraiser has to deem the house meets all of FHA requirements.
Some of FHA’s house requirements may seem trivial to you, like a small crack in a window pane. You may think that $30 fixed that, so what’s the problem?
The FHA does insure loans for houses that have a crack in a window pane, unless you are getting a 203K loan and unless the work write-up includes that window pane being replaced.
Read more about the FHA 203K loan process.
Can You Buy A HUD Home With An FHA Loan?
Yes, you can. Again, you can buy a foreclosed home with FHA loan money if
- the condition of the property meets FHA’s standard loan program or
- if you are getting a 203K loan.
Obviously, the borrower must be able to qualify for an FHA loan, too.
So, what’s the next step, now that you’re no longer wondering if buying a foreclosed home with FHA loan funds is possible? If you’ve decided that you’re going for a foreclosed property, you must find a real estate agent that specializes in that kind of property.