Will FHA loan on REOs and Short Sale?

Asked by Lara, Croft Mon Feb 16, 2009

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Steven Ornel…, Agent, Fremont, CA
Mon Feb 16, 2009
Lara, just a quick FHA benefits summary:

1) 3.5% minimum Downpayment.
2) Up to a 6% Seller Credit allowed for buyer's closing costs and Seller concessions (non-FHA max is 3%).
3) FHA requires that identified safety/health issues be corrected.
4) FHA allows up to $8,000 in financed energy efficient upgrades without negatively affecting borrower's debt-to-income ratio.
5) Cash reserves not required.
6) Upfront Mortgage Insurance may be financed.
7) Non-occupying co-borrowers are allowed.
8) High and flexible qualifying ratios.
9) FHA loans are assumable.
10) No pre-payment penalties.
11) Will consider "compensating factors" in determining whether a loan should be granted.

Perhaps the only real negative:
While FHA only requires a 3.5% down payment this means you will be financing 96.5% of the sales price and you will have to pay Mortgage Insurance for a MINIMUM of 5 years, or until you have paid your original LOAN AMOUNT down to 78% (not that the loan amount is 80% of current market value, which is typical for non-FHA MI removal). This "78% or 5-year Rule" before Mortgage insurance can be terminated is covered here: http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/fi…

If you need a sharp FHA loan broker I have two great referrals (just email me offline).

Best, Steve
3 votes
Robert Chome…, , San Diego, CA
Mon Feb 16, 2009
Hi Lara,

As others said, yes FHA will lender on a REO or short sale.

I think there's a bit of a misconception that FHA loans take much longer than conventional. The only difference with FHA and conventional loans is that on the FHA appraisal, the FHA appraiser can ask for "health and safety items" to be fixed prior to close. But in many cases, they don't ask for anything to be fixed. Make sure the property has a working stove and a heating system that works, FHA requires this.

An FHA loan can be assumed by a new buyer, which is a fantastic selling advantage, especially if rates rise in years to come. But that new buyer still has to fully qualify with credit and income documentation to assume that loan.
1 vote
Wayne Giroux, Agent, Los Gatos, CA
Mon Feb 16, 2009
Though FHA loans are appropriate for almost any kind of purchase for your personal residence, you need to be careful that the loan approval process may take longer than some other loans.

Some corporate owned properties involve custom seller contracts that may not leave enough time and may leave you exposed to being committed to the sale before you have been approved.

The two key actions to take, therefore, are these:

1. Work with your lender to get pre-approved (not pre-qualified) for FHA loans - go through the whole application process - that may short cut the final approval considerably
2. Make sure the Realtor representing you negotiates enough time in the purchase agreement to complete the application process. Understand there may be clauses that automatically remove a contingency before you might be ready, and develop a plan to deal with such clauses. You Realtor will be able to assist you

... Regards .... Wayne
1 vote
CJ Brasiel, Agent, San Jose, CA
Mon Feb 16, 2009
Lara -

Yes - you can obtain FHA loans to purchase short sales and REOs. Realize that the appraisal process and underwriting process can be more "picky" about any repairs needed. I have been successful with FHA loans and also getting the seller to credit the buyer closing cost up to 3%.

Web Reference:  http://www.TalkToCJ.com
1 vote
Phil, , Guilford, CT
Fri Apr 3, 2009
From what I know, FHA will loan on a home that is in good condition. If it needs alot of repairs, you'll need the 203k loan which bundles in repair money. FHA should have no problems with a short sale. However, from what I hear, banks would much rather see a conventional or cash offer over a gov. backed loan offer. So at the end of the day, the lien holder might be the one to frown on the purchase.
0 votes
Debbie OBrien, Agent, Manorhaven, NY
Fri Mar 20, 2009
I recommend that readers (here) look at Steve's answer. It is informative, accurate and spot on.

FHA will scrutinize appraisal which could interfere with using that loan to purchase a property that is in need of repair. As others state, a 203K would be an alternate option.

From my experience, short sales are best negotiated when the potential buyer is ready to close without asking for concessions and considerations. Short sales can be successful and expedited using a bridge loan or hard money. At the right price the buyer can still see a tremendous bargain even after paying points and the higher interest rates for the hard money (short term) loan.

Buying foreclosures and short sale properties are most profitable when the buyer is flexible and not emotional about any particular property. My advice is don't fall in love with the house until you get everything in line.
0 votes
HomeBanco.com, , 33322
Thu Mar 19, 2009
Fast answer:
Yes you can,

Just Make Sure Your Contract HasThe Right Language.

Jose Antonio
0 votes
Leslie Jones, Agent, Jacksonville, FL
Thu Mar 19, 2009
A home has to pass an FHA inspection. If it doesn't, which many REO,s and short sales don't, you can get a 203K FHA loan which includes the rehab.
0 votes
Sandy Michae…, , 98684
Thu Mar 19, 2009
FHA is a great why to go for Short Sales & REO's - especially for 1st Time Homebuyers!

Washington State Housing Finance Commission provides down-payment assistance to qualified first time buyers on your FHA loan, and you can also ask the seller to pay all or some of your closing cost. I have not experienced any delays with the appraisal process. REO's here in Clark County are usually the best buy. FHA does require that you have a home inspection - which every buyer should do anyway!
Web Reference:  http://www.sandymichaels.com
0 votes
Gary Frimann…, Agent, Gilroy, CA
Mon Feb 16, 2009
Yes. The previous answers were all good.
One thing to keep in mind... The FHA does not make loans, they are just the gov't entity that insures them. It is a good loan also because it is fully assumable after one year, so if interest rates go up, you can sell the house subject to the loan, as the loan has value. Much like seeling a property with a good lease.
Good Luck on house hunting.
Gary Frimann
0 votes
Marty S, , Irvine, CA
Mon Feb 16, 2009
Yes they will. Sit down with a local mortgage broker and discuss your pre approval options.

I am a mortgage broker. If I can be of service, please let me know!

Martin Smith

Precision Funding
877-238-6324 Ext 704
877-238-6324 FAX
0 votes
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