Is it difficult to be approved for a mortgage loan and FHA loan on foreclosed properties? Where do I begin?

Asked by House, Pittsburgh, PA Tue May 26, 2009

What steps to take?

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Jeffrey Benn…, Agent, Pittsburgh, PA
Tue May 26, 2009
FHA guidelines are always changing. Sometimes there are special programs for rehab (e.g., through HUD). It's worth checking out with a (reputable!) mortgage professional.

In general it ranges from very difficult to impossible to get a *conventional* loan for a foreclosed property. To get a loan you need an appraisal. To get an appraisal (these days), you need to have the utilities on. However, foreclosures will generally have the utilities off -- and, in many cases, missing or damaged infrastructure besides (especially copper plumbing, which is often stolen). You would have to do significant work to even get to the point where you might be able to turn them on.

The banks don't know what will happen if they turn on the utilities, particularly if the property has been vacant for a while. It might blow up if they turn the gas on, or leak and cause water damage if they turn the water on, or start a fire if they turn the power on. They don't want to risk lowering the value further (or incurring liability), so they simply don't do it.

Also, for lower end properties, there are practical limits on how much of a loan you can get (due in part to regulatory limitations such as interest rate caps). It's hard to get a conventional loan below $40,000 or so.
Plus, as a practical matter, you'll get outbid by cash investors. Few banks will accept any significant contingencies.

Experienced / professional investors use hard-money lenders (short term, high interest loans from private individuals or small groups), but those are nothing like a conventional mortgage. They assume you're going to fix it up and resell quickly, or at least bring it to the point where you can get a conventional loan on it.

For higher-priced corporate-owned properties, sometimes you can work with them if the property is in good shape and the price is reasonable.

Start with a pre-approval (based on your credit/income/liabilities, and not an a particular house). That will set your price range. After that it depends on the house and whether it's VA, HUD, or corporate. Before making an offer, ask whether they accept financing or any contingencies (some will make you pre-inspect at your own expense) .

Ask your mortgage company about appraisal requirements, and the sellers about the state of the utilities. Checking all this out in advance will avoid going through a lot of work only to have it fall through in the end. Good luck!
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