Can You Use FHA Financing on a Bank-Owned Property or a Foreclosure?

FHA inspections must be conducted during the escrow period.
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If you're on a tight budget and you qualify, FHA loans offered by the Federal Housing Authority may be the financing you need to buy your first home. FHA financing, secured with 3.5 percent cash down, can be more affordable than traditional mortgages, which often need 10 to 20 percent cash down. While FHA loans can be used on certain bank-owned properties and foreclosures, the loans come with standards and steps that may make purchasing these types of homes more difficult.


Like buying a traditional home, buying a foreclosure or bank-owned property requires that you get pre-approval for your FHA loan. To qualify for pre-approval, you will need to provide information such as your employment and residence details within the last two years and the amount of your gross monthly salary, along with any foreclosures or bankruptcies on your record. Your stated income, backed by W2's that you must provide, has to be high enough to cover monthly mortgage payments.

FHA Standards

Not all foreclosures and bank-owned properties are eligible for FHA financing. The Federal Housing Authority must assess a home's value and habitability before approving an FHA mortgage for it. Poor habitability factors that would affect financing qualification on a foreclosure include lack of electricity, no running water, and potential hazards such as visible floor settling, mold or extensive water damage. FHA financing also requires that a home's price fall under geographic limits, meaning the foreclosure you intend to buy is not overpriced for its market. To check FHA mortgage limits, enter your regional information in the U.S. Department of Housing and Urban Development's online calculator (see Resources).

Inspection Process

After you've submitted an offer on a bank-owned property or foreclosure, you must set up inspections during the escrow period. These inspections are conducted by licensed professionals and can provide a better habitability picture to the FHA. Inspections should include termite, septic, well and structural foundation assessments. If any of these come up more negative than anticipated, you can back out of the offer or the lender may deem the house not up to FHA standards and decide not to finance the purchase.

Appraisal Process

Along with assessing a home's habitability through inspections, the lender will also send out an appraiser to examine your potential home and decide whether it's priced at the right value. Factors that may drag down a home's value include property age, square footage, older appliances and comparable home sales in the neighborhood. If the appraiser decides the house is priced too high, your FHA financing can fall through.

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