How to Buy a REO Property With an FHA Loan

The Federal Housing Administration (FHA) doesn't lend money but they do insure, or back, several loan programs. When there is an influx of REO (also known as bank-owned or foreclosure) properties into the real estate market, there is also an increase in REO financing options. If you meet minimum requirements, and choose a property that meets Federal Housing Administration (FHA) standards, you can buy an REO property with an FHA backed loan.


  1. Image titled Buy a REO Property With an FHA Loan Step 1
    Familiarize yourself with the different FHA backed programs and requirements.
    • FHA-backed loans require that you have a minimum down payment of 3.5 percent. Your down payment may be higher based on the loan terms that you qualify for but it will not be less than 3.5 percent of the purchase price.
    • You must provide income documentation high enough to cover the payments.
    • FHA-backed loans also require that the home price falls under federally mandated geographic limits. The geographic limits vary by location and fluctuate with market standards. You can verify the geographic limits for the areas that you are considering by using this calculator:
    • You will also be required to pay a loan insurance premium (approximately 1.5 percent of the full value of the loan).
    • You can only have 1 FHA loan at any time.
  2. Image titled Buy a REO Property With an FHA Loan Step 2
    Consider hiring a real estate broker with FHA-backed loan and REO experience. You can act as your own representative but the paperwork and program complexities involved may be difficult unless you have previous real estate experience.
  3. Image titled Buy a REO Property With an FHA Loan Step 3
    Contact an FHA loan specialist at a local bank to get pre-approved for your loan.
    • You will need to have your last 2 years of addresses, social security numbers, 2 years of employment information, current gross monthly salary, current check stubs, 2 years of past W-2 forms, 2 years of personal tax returns, current income statement, balance sheet for self-employed individuals, checking and savings account information, investment account information, and information on any existing loans. You will also need documentation on other real property that you possess, the estimated value of all your personal property, certificate of eligibility and DD-214 (veterans only).
  4. Image titled Buy a REO Property With an FHA Loan Step 4
    Locate a property that meets FHA standards. These requirements are less stringent than they once were.
    • There are now FHA loans available to cover properties that require repairs. FHA 203(k) loans allow you to borrow up to $35,000 above the price of the house to make repairs. You may wish to have a professional inspection done to ensure that repairs needed will not exceed the amount allowable by the program that you applied for.
  5. Image titled Buy a REO Property With an FHA Loan Step 5
    Submit your offer or if you hired a real estate broker, they will submit the purchase offer, escrow check and loan pre-approval letter to the bank or management company.
    • Unlike real estate transactions in the private sector, transactions that involve bank-owned properties generally take 2 to 3 months to close. You may have to wait 30 days or more before you find out if your offer has been accepted, rejected or whether a counter offer has been made.
    • Once your offer has been accepted, you or your broker will coordinate with the closing company to arrange a closing date. The bank will typically be represented at the closing by the real estate agent who listed the property for them.
    • Once all the paperwork has been signed, the sale will be complete.


  • If the bank that owns the REO property is not providing a title insurance policy, it would be wise to pay for 1 yourself to ensure that you don't waste your time and effort on a property that cannot be legally conveyed. A title insurance policy protects your investment in the event that there are defects in the title such as liens, or incorrect foreclosures that cause the title to be non-conveyable.

Article Info

Categories: Business | Finance and Business