It is possible to obtain a loan insured by the Federal Housing Administration (FHA) to purchase a sheriff sale home, but you must have a pre-approved FHA-insured loan before bidding on the property. Because sheriff sale homes are foreclosures, they may be in need of repair. In this case, you would want to obtain an FHA-insured 203(k) rehab loan.
FHA Insured Loans
FHA does not make or finance mortgage loans; it insures loans made by private lenders. With an FHA-insured loan, if the borrower defaults on the loan and loses the property to foreclosure, FHA will pay the lender a percentage of the borrower’s outstanding defaulted loan balance. Because these loans are insured through the FHA, credit and down payment requirements are less stringent than those of conventional mortgage loans.
Understanding Sheriff Sales
When you bid on a sheriff sale home, you must have either cash or a pre-approval letter from your lender. If you win the bid, you receive a sheriff’s deed. You do not own the property at this point, but you do have ownership rights. When the court issues you a sheriff’s deed, the official redemption period for the previous property owners begins.
Mortgage Redemption Periods
A redemption period is the amount of time the previous property owners have to pay off their mortgage loan and retain their property. If this occurs, the court destroys your sheriff's deed and you cannot purchase the property. If the previous owner does not pay off his mortgage after the redemption period ends, you will close on your loan and own the property. Not all states offer redemption periods for foreclosed homes sold via sheriff sale. Familiarize yourself with your state's laws on sheriff's sales.
FHA-Insured Loan Qualifications
You must have at least two years of steady employment and a minimum Fair Isaac Corporation (FICO) credit score of at least 580 to take advantage of FHA's 3.5 percent down payment program for FHA-insured loans. If your credit score is between 500 and 597, you have to put down a minimum of 10 percent of the property sale price. You cannot have any outstanding collection accounts or judgments on your credit report. Bankruptcies must be discharged for at least two years before the date you apply for an FHA-insured loan.
FHA-Insured 203(k) Loans
FHA-insured 203(k) loans provide extra money for sheriff sale homes that need improvements or rehabilitation. You can use FHA-insured 203(k) loans for single-family homes and multiple-family homes up to four units. This loan must be the first lien or first mortgage on the property. First lien simply means that if you should default on your loan, FHA has the first priority to any proceeds from the sale of the home for paying off your loan balance.
