A Federal Housing Administration loan is a government-secured loan that makes the American dream of owning a home a reality for those who may not qualify for a conventional loan. FHA loans feature more forgiving credit guidelines and require a lower down payment than conventional loans. To get the most for your dollar, you may want to consider using an FHA loan to buy a real estate owned (REO) property.
An REO property is a home that has already been foreclosed and is owned by a lender. According to RealtyTrac, some REO homes can be purchased well below market value.
FHA Eligibility Requirements
Review the FHA loan requirements to determine if you are eligible. As of 2019, FHA loans require buyers to have a minimum down payment equal to 3.5 percent of the home's price. As with a conventional loan, you will need to prove you are able to afford the monthly payment.
Although the credit criteria are not as strict, you will still need to meet the minimum credit score requirement. The Department of Housing and Urban Development (HUD) states that borrowers with a credit score of at least 580 are eligible for maximum financing. Borrowers with a score between 500 and 579 are limited to 90 percent financing.
Obtaining Pre-Approval for FHA Loan
Contact an FHA-approved loan specialist, who'll be able to pre-approve you for a loan. You can check with your local bank or visit the HUD website to search for a lender in your area. Prepare to provide financial information, including tax returns and W-2 forms for the past two years, recent pay stubs, and bank account balances.
Working with a Real-Estate Broker
Find a real estate broker who works directly with REO properties. Some brokers have long-term relationships with banks and know about REO FHA listings before they hit the market database. Not all brokers are HUD-qualified, so be sure to find one that has a current annual certification, which is required by HUD. HUD-certified real estate brokers are able to show and advertise homes as well as submit your offer.
Finding Properties and Negotiating Prices
View properties. When you are pre-approved, you know exactly how much you can afford. REO property prices are not necessarily firm; depending on the home and bank, there may be some room for negotiation on the price.
HUD establishes FHA loan limits, which are based on different geographical areas. You can search the HUD FHA database by state and county to find the loan limits in your area by visiting HUD.gov, searching for "FHA mortgage limits" and following the prompts to use HUD's search tool.
The Importance of Home Inspections
Hire an inspector to make sure the home meets FHA guidelines. An FHA inspection is designed to ensure the home is safe and that there are no serious structural or mechanical issues. For example, smoke detectors and carbon monoxide monitors must be hardwired. If you find a home that is not up to par, you may be able to borrow funds under the FHA 203k program to cover repairs and renovations.
Making an Offer
Submit your offer along with the escrow check and your FHA loan pre-approval letter. The real estate agent will draw up a contract and submit the offer to the listing agent on your behalf. Expect to wait a few business days before finding out if your offer was accepted, rejected or countered. Bank-owned properties can also take longer to close than a privately owned home.