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Once you get approval for an FHA loan, you may wonder what types of homes are available to you. One common question is whether or not you can buy a pre-foreclosure home with an FHA loan. The good news is that you can utilize your FHA loan for a pre-foreclosure property. However, you will need to meet additional requirements if the seller has an active FHA loan.
Pre-foreclosure properties must meet basic FHA requirements like any other home purchased using an FHA loan.
When using an FHA loan, the first thing to remember is that the property must be your primary residence. The FHA loan program helps to get more Americans into better living situations. The direct residence rule is designed to keep investors from using this loan type to buy investment properties.
An inspection is required to determine the habitability of the home. It is essential since the property is required to be a primary residence. Generally, the inspector works for the buyer but must share the inspection report between both parties. A home inspection will identify any significant issues with the home and repairs things required by law before the sale.
An FHA-approved appraiser must evaluate any home before being approved for an FHA loan. The lender orders this appraisal, and the buyer must pay it. It ensures that the property meets FHA standards and estimates the home’s current market value.
Property purchased as a pre-foreclosure or short sale may need to meet additional requirements for FHA loan standards. It specifically applies in cases where the seller has used an FHA loan to acquire the home.
Minimum Purchase Price
Per the HUD publication “Pre-foreclosure Sales Program,” an FHA lender will only accept offers if the purchase price is at least 88 percent of the home’s current market value. This percentage only applies to the first 30 days. In the next 30 days that the house is available for sale, the minimum purchase price drops to 86 percent of the home’s value. Finally, after 60 days, the minimum purchase price drops to 84% of the home’s market value.
HUD offers an incentive to the seller if he sells the home within three months of applying for an FHA short sale. This incentive can be up to $1,000. In addition, if the buyer has an FHA loan, up to one percent of the new mortgage can be included in the seller’s closing costs.
The FHA requires an FHA short sale to be an “arm’s length” transaction. The buyer and seller must have no known relation to one another. Furthermore, the seller must be at least 31 days late on mortgage payments to be considered in default and approved for an FHA short sale.