If You Have an FHA Loan, Can You Buy a Foreclosed Home?

The FHA offers numerous loans to help you buy a foreclosed home.

If you have an FHA loan, you can buy a foreclosed home, potentially at a greatly reduced price. The housing market conditions of 2011 present an exceptional opportunity for investors and first-time homebuyers to snatch up one of the thousands of foreclosed properties available across the United States. Contrary to popular belief, FHA loans are not just for first-time homebuyers, but you need to be preapproved to buy a foreclosed home.

FHA 203(B)

The Federal Housing Administration (FHA) offers a loan called an FHA 203(B) designed for buyers of single-family homes. The FHA 203(B) loan allows the purchase of approved condominiums, public urban developments and single-family real estate homes. If you find a foreclosed property of interest and in move-in condition, the FHA 203(B) may be the appropriate loan for you if you are buying the home as your primary residence.

FHA 203(K)

The FHA 203(K) loan is commonly used to buy a foreclosed home, and the Section 203(K) program is HUD's (the U.S. Department of Housing and Urban Development) main program utilized for the rehabilitation and repair of single-family homes. Since the majority of foreclosed homes have suffered some degree of neglect, the FHA 203(K) loan allows you to include in the loan amount costs associated with updating, repairing or remodeling the home and only requires a 3.5 percent down payment.

FHA ARM

If you opt for an FHA adjustable-rate mortgage (ARM) to buy a foreclosed home, you will be shielded from the larger increases in interest rates and monthly payments that are common with most other ARM loans. Yearly interest can rise or fall no more than 1 percent annually, with a lifetime cap of no more than 5 percent above the starting interest rate. As a result, an FHA adjustable-rate mortgage typically takes closer to five years to reach its maximum rate, versus conventional ARMs that can cap within three years.

Bank REOs

Bank REO (real-estate-owned) properties are owned by a bank or other lending institution after receiving no bids for the properties during foreclosure auctions; therefore, the lenders retain ownership. Buying an REO property with an FHA loan can be difficult due to increasing lender restrictions regarding FHA-insured loans. Lenders now require you to have a minimum credit score of 640 to buy a foreclosed home with an FHA loan, which could keep up to 15 percent of FHA borrowers from qualifying for an FHA mortgage loan.

HUD Homes

A HUD home is a residential property with an FHA-insured mortgage acquired by HUD as a result of foreclosure proceedings carried out by the lender. The FHA steps in and pays the loan balance to the lender and takes ownership of the property to be sold as a HUD home, often at substantial savings to buyers. If you already have an FHA loan through prequalification, you can buy a foreclosed HUD home through HUD's auction site at HUDHomestore.com.

References

• FHA Home Loans: FHA Single Family Home Loan Program
• HUD.gov: Rehab a Home With HUD's 203(k)
• REO Properties: Bank Owned -- FHA Foreclosures -- HUD Property
• BankOwnedHome.net: Buying Homes and REO Land Becomes Difficult With FHA Loan Restrictions

Resources

• FHALoanPros: Free Mortgage Quotes From Lenders
• ConsumerAffairs.com; Buying a Home in Foreclosure: What You Need to Know; Fred Yager; April 2007
• Forbes.com; Buying a Foreclosed Home; Asher Hawkins; October 2009
• CNN Living; 9 Tips for Buying a Foreclosed Home; Jeanne Baron; February 2009
• FHA Loan: FHA Foreclosures by State
• HUD Homestore: Search for HUD Homes