skynesher / Getty Images Find out more about how to buy a foreclosure with an FHA loan, what the rules are, and the pros and cons of taking this route.

Can You Buy a Foreclosure With an FHA Loan?

Yes, you can buy a foreclosure with an FHA loan. The FHA offers mortgages that allow borrowers—even those with less-than-perfect credit—to have down payments as low as 3.5%. Although there are stringent property requirements and potential downsides to an FHA loan compared to a conventional loan, buyers can use FHA loans to purchase a foreclosed home as long as the home meets FHA standards.

What Are the Requirements for an FHA Loan?

FHA loans require the borrower to meet criteria related to their ability to repay the loan, and the property to meet a specific standard. Here’s how the requirements work.

Borrower Requirements

Credit status: The FHA is one of the best loan programs for people who don’t have great credit. If a borrower has a FICO score of 580 or higher, they can get approved for an FHA loan with only 3.5% down, as long as they meet the other criteria. But borrowers with FICO scores as low as 500 can still get FHA loans, although they may be required to commit a 10% down payment. Ability to repay: Lenders need to verify that borrowers have enough income to afford monthly mortgage payments. They’ll want to confirm that the borrower has a steady and stable job, and their debt-to-income ratio is less than 43%. The lender will review pay stubs, W-2 forms, tax returns, and other documents. Must be an owner-occupant: FHA borrowers must live in the home as their primary residence, so you can’t get an FHA loan for an investment property. Down payment: Borrowers must be able to make at least a 3.5% down payment (or up to 10%, depending on your credit status). They need to have the cash on hand, qualify for a down-payment assistance program, or receive down payment help as a gift. Mortgage insurance payments: Borrowers will pay an upfront mortgage insurance premium, then will continue paying insurance for the life of the loan. If they put down 10% or more, the MIPs will end after 11 years. PMI payments may also stop automatically once the home’s equity reaches a certain percentage of the loan value. If it is not automatic, a homeowner may request PMI to be stopped at such a point. Note that homeowner’s insurance may be required by the lender for the entire life of the loan.

Requirements for the Home

An appraisal: To be approved for an FHA loan, the home must be appraised by an FHA-approved appraiser. Minimum property standards: The FHA requires certain minimum property standards, such as that the home is in livable condition and has structural integrity. Major fixer-uppers typically will not be approved for FHA loans.

Pros and Cons of Buying a Foreclosure With an FHA Loan

Pros Explained

May find a good deal on a home that would otherwise be out of reach: Foreclosure sales are usually priced lower than comparable homes for sale, so you may get lucky.Provides an opportunity for borrowers with lower credit scores and a lower down payment to buy a home: Combining the lower sale price of a foreclosure with the more flexible lending requirements of an FHA loan could be a big win for buyers with limited funds or fair credit.

Cons Explained

Foreclosures still need to meet FHA property standards: If repairs need to be made to a regular property, the buyer can negotiate with the seller. But that’s usually not possible with a foreclosure, since this type of home is sold “as is.” It could be harder to find a foreclosed home that will qualify for an FHA loan.Competition with investors who may be able to pay cash: Investors like to scoop up foreclosures and “flip” them for a future sale. Banks like getting cash in hand, since it presents less risk than taking on an FHA borrower. This combination could make it tough to close a sale.