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.