Buying a Foreclosure or Short-Sale Using FHA Financing

Many people have asked me if it's possible to purchase a foreclosure or short-sale property using FHA financing. For some people, the question has never crossed their mind. Well, it should.

Why? Because foreclosure and short-sale properties are sold "AS IS". This means that the seller (bank) is unwilling to make any repairs on the property and "what you see is what you get" (click here for more information on what "AS IS" means).

But FHA financing includes an FHA appraisal/inspection which is different from a traditional appraisal. A traditional appraisal is a valuation of the home in it's current state as compared to similar homes that have recently sold. The person doing the appraisal is an appraiser in the traditioanl sense.

An FHA appraiser is someone who has been certified by the FHA to do appraisals on properties where the buyer is going with FHA financing. Unlike a traditional appraisal, an FHA appraisal is also an inspection of the property and provides an "inspection report" as part of the appraisal. The FHA appraiser will go through the property looking for defects that he/she may decide must be fixed or remedied in order for the property to meet FHA standards.

In other words, if the buyer or seller don't remedy the defects the FHA appraiser cited, the financing will not be approved.

This presents a potential problem for both the buyer and the seller. Should the FHA appraiser say that things need to get fixed in order for the financing to go through, the seller may be forced to fix those items in order for the sale to go through. But even though the bank wants to get the property off of their books, fixing anything whatsoever goes against the very basis of "as is". 

But that's IF the seller accepts the buyer's FHA-financed offer in the first place.

Banks don't like to see FHA financing on offers due to the issue I described above. Many banks will reject offers with FHA financing. Some will counter with having the buyer use conventional financing. A few banks may accept FHA financing, but don't expect it. Even if the bank accepts an FHA-financed offer, they may try to limit the dollar amount of the repairs they will make.

If the bank agrees to your FHA-financed offer without a limit to the amount of repairs, you may want to go buy a lotto ticket.

I'm not saying that getting an FHA-financed offer accepted is not possible. I'm saying that the chances of doing so are much smaller than had you gone with conventional financing. And there's no blanket policy - the same bank may reject FHA financing today and accept it tomorrow. Each and every property should be handled on a case-by-case basis.

Comments

[Heather Elias]

It is possible that for some of the bank owned properties, they will allow "lender required repairs" on what would otherwise be as-is deals. That includes VA financing and FHA. My personal experience only includes a Freddie Mac owned property, where they did complete repairs for the financing to go through. Not sure how typical this is for other bank owned properties.

Nice post!

[Danilo Bogdanovic]

You're right...there are instances where it is possible. But they're very few and far between.

Here's a real life example...I just showed a property earlier today that my buyer clients really like and want to submit an offer on.

I called the listing agent to check on on a few things including FHA financing and he said that the bank will not accept any FHA-financed offers.

[Mike]

Is this kind of loan discrimination legal? When it comes down to it money is money and why would a bank reject money whether it is through a conventional loan or a FHA loan? Unless, they are hiding something about the property that FHA criteria will pick up vs inspectors for conventional loans? Recently, I put a bid on a house and my agent told me that the bank selling the foreclosed property said that they accepted the offer. Then several days later my agent called and said the bank wants you to fill out a sales agreement stating that we are buying the house as is. We signed it and sent it to the seller. Then several days later my agent called me and said the bank has sold the property to another buyer and cited our loan type as the main reason for rejection. Is this legal? Any insight would be helpful.

[Danilo Bogdanovic]

I'm not a lawyer, but, from my understanding, yes it is legal. Check with a real estate lawyer where you are for more.

Do I agree with the bank not accepting FHA while accepting conventional financing? No, especially because many of my buyers are in the same situation as you - they're going with FHA financing. FHA financing is now cheaper than conventional financing if you have less than a 720 credit score, putting down less than 20% and especially if you're going jumbo (loan over $417K).

Your situation stinks. But it happens and seems to be legal. In Virginia, if it's not writing, it's worthless. And not just signed...the signed offer has to be delivered to all parties.

Here's the kicker...many bank addendums state that the bank (seller) has the right to void the contract for any reason whatsoever and without penalty prior to settlement. Like I said in a previous post, do you REALLY know what you're signing when signing the bank addendum?

The banks are getting away with a lot these days just like they got away with a lot earlier this decade. Seems to be a re-occurring theme...