Can You Buy a Foreclosed Home with a FHA Loan?
When someone purchases a home, that property effectively serves as the bank’s collateral. This means that if the homebuyer stops making payments to their mortgage, the lender will foreclose on the property, allowing the bank to take possession of the house.
Over time, we have seen that uncertain economic conditions bring a couple important realities. First, we see that there is a greater inventory of foreclosed homes on the real estate market during these times. This is because difficult economic conditions may result in higher unemployment rates which ultimately make it difficult or impossible for some to pay their mortgage. In other cases and during periods of economic stability, you would expect to see less opportunities to purchase a foreclosure as there are simply less on the market. With that said, there are situations where a buyer financially overcommits to a home or another personal circumstance results in a foreclosure of the property.
Whatever the case, from a home buyer’s perspective the Federal Housing Administration does offer affordable foreclosed home financing options that would come with any other home purchase.
Real Estate Investors Love Foreclosed Home Listings
Mortgage professionals will tell you that foreclosed properties sometimes require a great deal of repair depending on how the previous owner left it. Investors actually show favor to foreclosed homes that are in especially poor condition because their intention is to renovate and sell the house at a higher price. For people hoping to use a FHA loan choice, borrowers may find that it is more difficult to compete with investors who may be “all cash” buyers or are able to offer the bank a significant down payment. A cash transaction, for the bank, makes for a faster and less risky deal.
Why the FHA Establishes Minimum Property Standards
When determining whether or not to purchase a foreclosed home, if you plan on using a FHA insured mortgage, be aware that there are minimum property standards that must be meant.
You could have a great credit score and be the most ideal buyer in the world, however if the home you’re after is not on par with FHA’s requirements then you will have to look to a conventional home loan product.
In order to qualify, the house has to meet conditions that relate to safety, security and soundness. For most single family homes, a property appraiser will judge the property’s condition during the standard appraisal process and use the Uniform Residential Appraisal Report to describe their findings. A condominium has a similar type of report though it does ask some other questions that relate to common areas and any homeowners association that may be in effect. Ultimately, these reports will describe the condition of the property and prompt the appraiser to make note of any needs for repair, renovation, remodeling and more. As a buyer, to qualify for a FHA loan you need that property to show as inhabitable and free of any structural defects and any health and safety hazards. This means that the home must have plumbing, an intact roof, and other features that are typical and expected of a good home.
Why a FHA Loan May Help You Buy a Foreclosure
While there may be some pitfalls to look out for, there are many advantages to buying a foreclosed home. First, as a buyer you know that you are dealing with a motivated seller. The seller wants to conduct a speedy transaction to avoid additional financial loss and this may allow you to buy a home for well below market price. Depending on your situation, the seller may be willing to make repairs as well.
Depending on your location, FHA does offer high loan amounts and the program increased its loan limits to give more buyers the opportunity to utilize the program. Recognizing that not all markets are the same, the loan limits are set to greater amounts in regions where real estate is more expensive. For example, in San Francisco, the FHA loan limit is up to $729,750 for a one-unit property. This is an important component within the mortgage program because higher home loan limits allow borrowers to better compete for higher-priced homes while still being able to enjoy a low down payment of 3.5 percent (depending on your credit score).
What To Be Mindful Of
You should expect that your lender will order an appraisal called a fee appraisal. This is ensure that the home you’re interested in complies with FHA requirements. The fee appraisal is common because it is part of the traditional appraisal and also part of the inspection process. The appraisal part of this will provide an estimate of property value and the inspection will looks for structural and other defects including safety issues.
Your real estate expert will tell you that the fee appraisal is not meant as a substitute to the standard home inspection. From relationship perspective, the home inspector is hired by and works for you. As for the fee appraiser, that person is hired by the lender and typically does not perform as detailed a job as your inspector. As things go with foreclosure properties, be mindful that foreclosure owners are banks and have no direct and historical knowledge of the property’s shortcomings. As a buyer, do not expect to be given any property disclosures that a buyer would be privy to in a more common home transaction.
As mentioned, a big challenge that presents home buyers are repairs. The FHA rules dictate that sellers must make any necessary repairs to make a house meet FHA requirements before closing. Noting that foreclosures are most often sold in “as-is” condition, asking the seller to make repairs is almost never a possibility. To get around this, ask your realtor to be mindful of any HUD-owned foreclosures that may meet your criteria.
203(k) Rehab Loan
For homes that really need a lot of work, you may be able to qualify for a FHA 203(k) rehabilitation loan though this program does have slightly more stringent credit requirements than the typical FHA mortgage. Typically, you need to have a credit score that is above 600 and it is important to check your credit report for accuracy before applying for any loan. At a high level, this is a combination of a typical home purchase loan along with a construction loan… all in one.
The 203(k) program requires an appraisal of the home’s condition to determine the cost of rehabilitation and an analysis that helps project the property value after repairs. With this type of loan, the lender will finance both the sale price and also the home’s repair costs minus your down payment. This is an especially helpful program and does not require immediate occupancy. In these situations, the home buyer is not required to physically occupy the home until all repairs have completed. You should know that utilizing a 203(k) loan may require that your repairs are carried out by FHA-certified contractors.