FHA Loan for a Foreclosure
Many first time home buyers are looking to purchase a foreclosed property because there may be an opportunity to buy the home at a reduced price.
It is possible to use an FHA loan to purchase a foreclosure and also enjoy the benefits of a low down payment and competitive interest rate.
What is a Foreclosure?
A foreclosure is a property that has been reclaimed by the lender due to missed or excessive late payments on the mortgage. Once the property has been foreclosed upon, the lender will either sell the property at auction or will sell it on the open market through a real estate agency.
There are times when buyers have an opportunity to purchase a foreclosed home at a discount.
5 Stages of Foreclosure
When a lender forecloses on a home, there are multiple steps that occur from the time they first notify the homeowner, until the home is finally sold.
- Payment Default – When a homeowner misses one or more payments, they now have a payment default.
- Pre-Foreclosure Notice – After multiple missed or late payments, the lender may begin the pre-foreclosure process by issuing a notice of default letter. The lender must wait a minimum of 30 days after sending this letter before they can legally start the foreclosure process by filing a foreclosure complaint.
- Foreclosure Complaint is Filed – The filing of the foreclosure complaint must occur no sooner than 30 days from the notice of default letter, and no sooner than 120 days from the first missed mortgage payment.
- Notices and Motions for Judgement – During this time, the homeowner has an opportunity to rectify the situation and potentially stop the foreclosure from happening.
- Sheriff’s Sale – This is the point at which the property is sold at auction. The homeowner may have an opportunity to delay the sheriff’s sale or even pay the amount owed to the lender to prevent the home from being sold. Otherwise, the home will be sold to a third party at the auction, or the lender will keep the home to be sold on the open market.
Now you know how a REO (real estate owned) home ends up on the open market and available for you to purchase.
Using an FHA Loan to Purchase a Foreclosed Home
The FHA loan requirements are the same whether you are buying a foreclosed home, or a home that is being sold by the prior owner or even for new construction. The basic requirements are as follows:
- Qualify using fully documented income
- Down payment of 3.5%-10% depending upon your credit scores
- You must have a two year work history
- No recent bankruptcies
- The home must be your primary residence
Before you shop for foreclosures, you should understand how much you can get approved for. A pre-approval letter is something that many real estate agents require. If you are buying a home at the sheriff’s sale, you should know you have an approval in hand first.
We can help with your FHA pre-approval by completing this short form.
How to Buy a Foreclosure with an FHA Loan
When buying a foreclosure with an FHA loan, getting an approval is the easy part. Where it becomes challenging is when the property gets inspected. All homes that are financed with an FHA loan must pass the very strict FHA inspection. However, often times a foreclosed home is not well kept as the prior owners are being forced out.
If the foreclosed home you are buying needs work and you are concerned that it may not pass inspection, then we recommend considering the FHA 203k rehab loan. This version of the FHA loan will allow you to purchase the home and then borrow the money needed to rehab it. This also means you can delay the repairs that the FHA inspector has identified until after closing.
Read more about FHA 203k rehab loans because they can also be used to buy a foreclosure with an FHA loan.
Buying at a Foreclosure at the sheriff’s sale – If you buy a foreclosure at the sheriff’s sale, you may be required to put earnest money down the day of the auction. Then, you may be required to close within 30 days. These are also as-is purchases and you have no way to go back and ask for repairs to be completed. The only thing you are guaranteed is clear title.
You may try to snoop around the property to see what kind of condition it is in, but this would be an exterior inspection and you never know what you may find inside. As a result, this is the most difficult way to purchase a home using an FHA loan.
Buying from the Lender – If the lender is selling a foreclosed home, this is the best scenario for you. Although they are going to list the property for sale through a real estate agent at market price, they are more willing to negotiate on price so they can get the non performing asset off of their books.
In some instances you can get the seller (who is also a lender) to either fix items that are in disrepair, or provide you with a credit at closing. Another option is to ask the seller to provide a seller concession and help pay for your closing costs.
Pros and Cons of Buying a Foreclosure with an FHA Loan
There are some pros and cons that you should consider before buying a foreclosure with an FHA loan. Once you have reviewed these, you can decide whether buying a foreclosure is best for you or whether you want to use an FHA loan.
Pros
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- Opportunity to purchase at a reduced price.
- Small down payment
- Flexible Credit requirements
- Ability to borrow the money needed for repairs
- Seller concessions of up to 6% are allowed
Cons
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- If buying at auction, you may need to close fast
- If buying at auction, you may not have a chance to inspect the home prior to bidding
- The home may not have been cared for by the prior owners
- The home must be used as your primary residence
Does FHA Sell Foreclosed Homes?
You may be able to purchase a foreclosed home that is for sale by HUD. There are foreclosure Listings for Sale by HUD, but there are not many homes for sale and there is a lot of competition to purchase those homes.
When the real estate market is climbing, there are fewer homes for sale by HUD. When the market is in decline, the number of homes increases. This happens when the amount owed to the lender is greater than the current value of the home.
Can I Buy a House at Auction With an FHA Loan?
You can buy a house at auction with an FHA loan, but you should get pre-approved before going to the auction. You should also be certain that the home will be an FHA approved home. This also means the home would have to pass the FHA inspection.
When you purchase a home at auction you do not always have an opportunity to view the inside. There is also the potential to see competition at the auction driving up the price. Therefore, you really need to know what the home is worth and what your walk away number is if you plan to buy at auction.
Remember, FHA loans also require an appraisal so if you pay a price that is greater than the appraised value, you will need to make up the difference with a larger down payment.
Can You Buy a Pre Foreclosure Home With an FHA Loan
You can buy a pre foreclosure home with an FHA loan if you and the property both meet the minimum standards needed to qualify for an FHA loan.
When a home is in pre foreclosure, it is being sold by the current owner and not the bank. When this happens, the seller may be motivated to sell the home quickly before it is too late. It will be beneficial to find out how much is owed by the seller on the current mortgage and offer an amount between the current loan balance and the current value of the home.