FHA Loans for Homes in Poor Condition

Posted on September 25 By Michele Lerner

Question: I found a house I want to buy, but it's in bad condition. The kitchen appliances are missing and some of the windows don't open and close. I wanted to finance it with an FHA loan because I don't have a lot of cash for a down payment. My friend told me that FHA loans have to pass a home inspection. Does that mean I can't use one for this house?

Answer: Congratulations on finding a house to buy. While the FHA doesn't require a home inspection, an inspection is recommended. You don't want to find out after you own a home that it has severe structural problems or other issues that will be costly to fix.

FHA-insured loans do require an appraisal that reviews the condition of the home. If there are safety, security or other issues that impact the structural integrity of the home, the lender won't be able to approve the loan until those issues are corrected. Some examples include a missing stair rail, lack of a working heating system or mold. It sounds like some of the problems with the home you want to buy could fit into this category.

You could try to negotiate with the seller to make the repairs for you before you buy the property. However, since it sounds like no one is living in the property and the place is in disrepair, it may be unlikely that you can negotiate this option.

A better option is to consider an FHA 203(k) mortgage. This loan allows you to wrap all your repair/renovation costs into the mortgage. If the repairs are relatively minor, you can use a Streamlined 203(k) loan which doesn't have a minimum amount you need to spend. If you have major structural work to be done or other repairs, a standard 203(k) loan will be needed.

To qualify, your lender will need the same down payment and credit qualifications as any other FHA loan, except that your loan amount will be the combination of the current sales price and the costs of the repairs. Your debt-to-income ratio will be based on the monthly payments for the full loan. An inspection will be made when you have finished repairs to make sure they have been completed properly as well.

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