Around one in every 13,000 homes in Pennsylvania goes into foreclosure. Certain areas of the state experience much higher foreclosure rates. Philadelphia, for example, averages one foreclosure for every 5,000 homes.
This provides Pennsylvania buyers with a large pool of attractive foreclosed homes from which to choose. However, foreclosed homes may be subject to different purchase and financing rules than traditionally sold homes. This can leave buyers with important questions.
Can you buy a foreclosed home with an FHA loan? How are FHA loans different from other loans? How is the process of purchasing a foreclosed home distinct from the process of buying a traditionally sold home?
Here are the facts Pennsylvania buyers need to know.
What Is an FHA Loan?
FHA loans are mortgages backed by the Federal Housing Administration. Each loan is offered by a private FHA-approved lender but the FHA guarantees the loan, agreeing to pay the lender back in the event that the borrower defaults on the loan.
This guarantee enables lenders to offer loans to borrowers who might otherwise struggle to qualify for a mortgage. Specifically, this includes borrowers with:
- Little to no credit history
- Low or moderate credit scores
- Small down payments
- A high debt to income ratio
Qualified borrowers can use FHA loans to purchase most types of homes or properties including:
- Mobile homes
- Modular or manufactured homes
- Homes in foreclosure
Borrowers seeking to buy homes in poor condition may need to apply for specific types of FHA loans such as the 203k loan. Understanding program requirements for both buyers and homes can help borrowers determine which type of FHA loan is right for them.
FHA Loan Requirements
Federal Housing Administration program regulations generally require that qualified borrowers meet the following standards.
- Be lawful residents of the United States with valid Social Security Numbers
- Meet their states’ minimum age requirement for taking out a mortgage
- Demonstrate at least two years of steady employment or income
- Be purchasing a home to use as their primary residence
- Show no current delinquencies on their Credit Alert Verification Reporting System (CAIVRS) report
- Hold a credit score of 500 or above
- Be prepared to make a down payment of between 3.5 and 10 percent as dictated by their credit score and an FHA loan calculator
- Sport a debt-to-income ratio below 45 percent
- Show no bankruptcies or foreclosures on their credit score within the last three years
Homes to be purchased using an FHA loan must also meet certain minimum criteria. While the type of property does not matter, the condition of the property does. All homes must be inspected by an FHA-approved appraiser and comply with applicable safety and habitability standards.
Different types of FHA loans carry different standards. When seeking to purchase homes that need repairs, borrowers will need to specifically apply for the FHA loans intended for those kinds of properties. Alternatively, they can choose from pre-qualified HUD-owned foreclosures.
Benefits of an FHA Loan
Homebuyers enjoy a range of benefits when applying for and using an FHA loan to purchase a home.
- Applicants do not need high credit scores or down payments to qualify for a loan
- FHA loan limits on closing costs are strict and often much lower than average
- Interest rates are typically low
- Shaky credit history, such as one that includes bankruptcy or foreclosure, is not a barrier to receiving a loan
- FHA loans are “assumable” which can make the property appealing to future buyers when homeowners are ready to sell
In spite of the many benefits they carry, FHA loans are not entirely without their drawbacks.
Potential Drawbacks of an FHA Loan
Would-be borrowers tend to find two primary disadvantages associated with applying for and receiving an FHA loan.
First, to qualify for FHA home loans, properties must meet a set of minimum program standards. These standards are not the same as those assessed by a common home inspection. Thus, homes to be purchased using an FHA loan require additional appraisals which can lengthen the amount of time it takes to complete the sale.
Second, Federal Housing Administration program regulations dictate that foreclosed homes receive extra attention and research before they can qualify for purchase. Though this protects the buyer, the lender, and the FHA, it can further drag out the buying process.
Prospective buyers for whom a fast sale is a priority may elect to apply for other types of loans instead.
Among the other key factors that borrowers should consider when evaluating an FHA loan is that these loans require two separate types of mortgage insurance. Doubling up on mortgage insurance is one way the program compensates for using more lenient standards than traditional real estate loans.
Approved borrowers agree to pay an upfront mortgage insurance premium (UFMIP) at the time of purchase. Current program UFMIP rates are universally set at 1.75 percent irrespective of borrowers’ credit scores. If they cannot or prefer not to pay this at the time of purchase, borrowers can roll it into their mortgage payments.
Lenders charge annual mortgage insurance premiums (AMIPs) monthly as part of a borrower’s mortgage payment. AMIPs vary based on:
- Loan size and totals
- Loan length
- Borrowers’ loan-to-value (LTV) ratios
Once buyers have taken these factors into consideration, they are ready to explore the process of buying a foreclosed home.
Buying a Foreclosed Home: The Essentials
Above all else, foreclosed homes typically appeal to buyers due to the fact that they sell for below market value. By choosing a foreclosed home, buyers can secure more house for their dollar or afford to buy a home in a neighborhood that might otherwise be out of their price range.
This benefit is balanced by risk, however. Properties in foreclosure are sold “as-is” without the opportunity to require sellers to make improvements or reduce the sale price. Buyers accept that homes may require some work or investment post-purchase.
Navigating the Process
Navigating the foreclosed property purchase process is not the same as buying a house on the traditional market. Buyers need to:
- Obtain a Preapproval Letter from their lender
- Arrange for property inspections, including FHA appraisals
- Complete a title search or contract a professional to do so
- Evaluate and negotiate contract contingencies
Each of these steps can be complicated. Working with a professional and experienced real estate agent familiar with the region will yield the best results. It will also minimize delays and risk, providing buyers with an optimal experience.
Can You Buy a Foreclosed Home With an FHA Loan?
Can you buy a foreclosed home with an FHA loan? Yes, FHA loan recipients routinely and successfully purchase foreclosed homes.
Our team of exceptional real estate agents can assist you in finding and securing the foreclosed property that is right for you. Schedule a consultation today to learn more about how we can empower you to buy the Pennsylvania property you desire.