You can add foreclosures to your list of potential properties to explore if you're in the market for a home and plan to receive a Federal Housing Administration (FHA) loan. Borrowers can use an FHA loan to buy a home that is in foreclosure through the FHA. Learn more about buying a foreclosure with an FHA loan, the requirements, and the benefits and drawbacks of doing so.
Can an FHA Loan Be Used to Purchase a Foreclosure
Yes, an FHA loan can be used to purchase a foreclosure. The Federal Housing Administration (FHA) offers mortgages with down payments as low as 3.5 percent for borrowers with less-than-perfect credit. Even though FHA loans have more stringent property requirements and potential drawbacks than conventional loans, purchasers can use FHA loans to purchase a foreclosed home as long as it passes FHA guidelines.What Do You Need to Qualify for an FHA Loan
FHA loans require the applicant and the property to meet specific requirements relating to their ability to repay the loan. Here's how the specifications work.Requirements for Borrowers
Credit score: For consumers with poor credit, the FHA is one of the most acceptable lending options. Borrowers with a FICO score of 580 or better can qualify for an FHA loan with only 3.5 percent down if they meet the other requirements. Borrowers with FICO scores as low as 500 may be eligible for FHA loans, but they may be asked to put down a 10% down payment. Ability to repay: Lenders must ensure that borrowers have sufficient income to make monthly mortgage payments. They'll want to ensure the borrower has consistent work and that their debt-to-income ratio is less than 43%. The lender will examine pay stubs, W-2 forms, tax records, and other papers. FHA borrowers must live in the home as their primary residence; thus, you won't be able to receive a loan for an investment property with an FHA loan. Borrowers must be able to put down a minimum of 3.5 percent on a home (or up to 10 percent, depending on your credit status). They must have the funds on hand, be eligible for a down-payment aid program, or be given down-payment assistance as a gift. Payments for mortgage insurance: Borrowers will pay a one-time mortgage insurance charge and then continue to pay insurance for the life of the loan. MIPS will expire after 11 years if they put down 10% or more. 3 When the home's equity reaches a particular percentage of the loan value, PMI payments may be automatically stopped. A homeowner may request that PMI be stopped at this time if it is not automatic. Note that the lender may require homeowner's insurance for the duration of the loan.Household Requirements
An FHA-authorized appraiser must value a residence to be qualified for an FHA loan. Minimum property criteria: The FHA stipulates that the residence must meet specific minimum property standards, such as being livable and structurally sound. FHA loans are often not authorized for significant fixer-uppers. These homes were formerly owned by FHA borrowers, indicating that they were in excellent condition (at least at one point). If it's a HUD-owned foreclosure, you might have a greater chance of locating one that fulfills FHA requirements. You'll also have a head start on bidding before investors are allowed in if you plan to live in the property.The Benefits and Drawbacks of Using an FHA Loan to Purchase a Foreclosure
Pros- You might get a terrific deal on a house that would otherwise be out of your price range.
- It allows borrowers with poorer credit scores and a lesser down payment to purchase a home.
- Foreclosures must still meet FHA property requirements.
- Investors that may be able to pay cash are competing for your business.
Advantages explained
You might get a terrific deal on a house that would otherwise be out of your price range: You might get lucky because foreclosure sales are frequently priced lower than comparable homes for sale. Allows borrowers with weaker credit scores and a lower down payment to purchase a home: For buyers with limited funds or fair credit, combining the reduced sale price of a foreclosure with the more flexible lending requirements of an FHA loan could be a significant gain.The drawbacks are
Foreclosures must still meet FHA property requirements: The buyer and seller can work out a deal if a specific property requires repairs. A foreclosure, on the other hand, is usually not possible because it is sold "as is." Finding a foreclosed home that qualifies for an FHA loan may be more difficult. Competition from cash-strapped investors: Investors want to grab foreclosures and "flip" them for a profit. Banks prefer having cash on hand because it reduces the risk of taking on an FHA borrower. This combination could make closing a deal complex. An FHA 203(k) loan may be preferable if a foreclosure home requires extensive renovations. This sort of loan is similar to an FHA loan in that it allows you to borrow for both the purchase and repair of a house.What Is the Process for Getting an FHA Loan
An FHA loan is applied for in the same way as any other mortgage. To get started, find a lender that offers FHA loans and fill out an application. You'll be required to provide financial proof, such as pay stubs, W-2 forms, and tax records. You'll also grant the lender permission to check your credit score.What Are the Requirements for an FHA Loan
FHA loan conditions are a little more lenient than conventional loan requirements, making them an appealing alternative for first-time homeowners and individuals with less-than-perfect credit. You'll still need to fulfill minimal credit requirements, as well as the other borrower and property conditions listed above, such as stable employment, a debt-to-income ratio of less than 43%, and a prospective house that satisfies FHA minimum standards.On an FHA loan, how can you get rid of the PMI
Borrowers who use the FHA pay an upfront mortgage insurance cost and then pay monthly insurance for the life of the loan. The only exception is if you can put down 10% or more on a home when you buy it. In that situation, you will no longer be required to pay insurance premiums after 11 years. Once the borrower's home equity reaches a particular proportion, the lender will either cease PMI automatically or at the borrower's request.How Much Do FHA Loan Closing Costs Cost
FHA loan closing fees should be around 3% to 4% of the total cost of the house you're buying. Closing costs include loan fees, attorney fees, title fees, and other expenditures, as well as your upfront mortgage insurance payment.