An Active Option Contract occurs after you and the seller have agreed on all terms on the contract. Then, during the "option" you can actually walk away for any reason, normally of course walking away is because of a repair issue where the buyer and seller cannot come to come sort of resolution. Inspections need to occur during your option. It is a very important part of your contract. If you have more questions, we are always happy to help.
Brenda covered the explanaton pretty well. This is the time for you to get a home inspection done especially on a foreclosure since there is no seller's disclosure. You would be surprised what those inspectors can find that we can't see as regular folks... You will also need a termite inspection since you are doing and FHA loan... Your Realtor has already explained this to you, I am sure.