Can one purchase a foreclosed home with a FHA loan? If yes, how?

It is possible to purchase a foreclosed home with an FHA loan, but the FHA has put in place some standards to protect homebuyers in this case, and these can make finding the perfect place at the perfect price a little trickier.

Although nearly any type of home qualifies for FHA financing, the house you buy must be worth the purchase price and it must meet safety and habitability standards. Although restrictive in some respects, the standards are actually helpful when you're purchasing a foreclosure. Foreclosed properties are often in bad shape, but they're usually sold as-is, which means the seller won’t make repairs.

Your lender will order a special appraisal -- called a fee appraisal -- to make sure the home meets FHA standards. The fee appraisal is a part traditional appraisal and part inspection. The appraisal part estimates the home's value. The inspection part looks for defects and safety issues.

Because of these rules set in place by the FHA, repairs are the major challenges in buying a foreclosure with an FHA loan. The rules say that sellers must do the repairs necessary for making the house meet FHA standards, and they must do so before closing. Because foreclosures are usually sold as-is, asking the seller to make repairs isn't an option, and this greatly limits your options. One way around this is to purchase a HUD-owned foreclosure. HUD (Housing and Urban Development Dept.) houses generally meet FHA financing standards.

If the foreclosure you want to purchase is in poor condition, you may be able to use an FHA 203(k) rehab loan to purchase the home and do the repairs after you move in. The 203(k)'s credit standards are a little tougher than the standards for a regular FHA mortgage, the interest rate is higher and you may have to work with an FHA consultant and FHA-certified contractors. On the upside, you'll have a much wider range of foreclosures to choose from and so a better shot at finding that diamond in the rough at a bargain price.

- Moore