Financing Your REO Home with an FHA Loan

by Linda Payne (9-24-09)
Heard of an FHA loan, but aren't sure exactly what one is, how it's different from a conventional loan or if it's right for you? Maybe we can help.

The Federal Housing Administration (FHA) manages the government home loan insurance program. The FHA insures loans granted to home buyers who might not otherwise qualify for a loan and assumes the risks associated with the loan for the lender.

The main benefit of an FHA loan versus a conventional loan is that FHA loans are easier to get for several reasons:
1. Your credit score doesn't have to be as high with an FHA loan, so it's easier to qualify.
2. Your required down payment will be less with an FHA loan.
3. You can use money given to you by a family member, a government agency, or a non-profit    organization for your down payment on an FHA loan.

A disadvantage to getting an FHA loan is that the loan limits with FHA loans are usually lower than with conventional loans. However, under the American Recovery and Reinvestment Act, FHA home loan limits will be raised to $729,750 for high-cost areas until December 31, 2009.

Another thing to keep in mind is that with an FHA loan, you'll have to pay for mortgage insurance, which is approximately 1.75% of the loan amount of a 30-year loan. You can, however, wrap this into your mortgage payments, and the interest you pay on the mortgage for your primary residence is tax deductible.

For many home buyers, the benefits of an FHA loan outweigh any disadvantages. And FHA loans are not just for first-time home buyers, which is a common misconception. As long as you meet the loan requirements, you can qualify for an FHA loan, whether you're buying a home for the first time or the fourth time and whether you're purchasing or refinancing a home.

So how does an FHA loan apply to REO homes? With the FHA's Section 203(k) loan program, home buyers can finance a home and the costs to renovate the home in one loan, the amount of which is based on the projected value of the home once the renovation is done.

The FHA is part of the Department of Housing and Urban Development (HUD). You can find out more about qualifying for an FHA loan, what documents you'll need to provide your lender, loan limits in your area, and more specific information about financing an REO home with an FHA loan when youvisit the HUD website.