The Federal Housing Authority insures mortgage loans to help qualified buyers with little cash and less-than-stellar credit purchase homes. You can use an FHA loan to buy just about any type of house, including stick-built, modular and manufactured or mobile homes. You can even use an FHA loan for a foreclosure.
As long as the foreclosed home meets the FHA's requirements for factors like value, safety and habitability, you can use an FHA loan to purchase the home.
FHA Loan Basics
Although nearly any type of home qualifies for FHA financing, the house you buy must be worth the purchase price and it must meet safety and habitability standards. Although restrictive in some respects, the standards are actually helpful when you're purchasing a foreclosure. Foreclosed properties are often in bad shape, but they're usually sold as-is, which means the seller won’t make repairs.
Obtaining a Fee Appraisal
Your lender will order a special appraisal – called a fee appraisal – to make sure the home meets FHA standards. The fee appraisal is part traditional appraisal and part inspection. The appraisal part estimates the home's value, while the inspection part looks for defects and safety issues.
Getting a Home Inspection
The fee appraisal is no substitute for a home inspection. Whereas the fee appraiser works for the lender, the home inspector works for you and does a more detailed job. This is especially important when you’re buying a foreclosure. Foreclosure owners are lenders and other entities that have no direct knowledge of defects and so aren’t required to provide the property disclosures that other sellers must share with buyers.
Handling Repair Challenges
Repairs are the major challenges in buying a foreclosure with an FHA loan. FHA rules say that sellers must do the repairs necessary for making the house meet FHA standards, and they must do so before closing. Because foreclosures are usually sold as-is, asking the seller to make repairs isn't an option.
One way around this is to purchase a HUD-owned foreclosure. HUD houses generally meet FHA financing standards.
203(k) Rehab Loan
If the foreclosure you want to purchase is in poor condition, you may be able to use an FHA 203(k) rehab loan to purchase the home and do the repairs after you move in. The 203(k)'s credit standards are a little tougher than the standards for a regular FHA mortgage, the interest rate is higher, and you may have to work with an FHA consultant and FHA-certified contractors. On the upside, you'll have a much wider range of foreclosures to choose from and so a better shot at finding that to-die-for diamond in the rough at a bargain price.