How to get FHA backed loan work with REO?

Question

Hello,
We are planning to make an offer on REO. Property don't have major problems, but I think there will be issues passing FHA inspection. (garage converted to room, illegal)
I really want that property and the only options for me to go with FHA. I will live in house. 
I know banks don't like FHA, because of inspection.
I'm planning to get certified FHA inspection. And submit offer with inspection.
The question is: what I have to put in contract to make repairs done before closing. I will pay for repairs.
Any other ideas?
Thanks to everyone.

J Scott · Answer

Mike -

Unfortunately, this is going to be a very difficult situation for you.  It's very unlikely that the bank will agree to do any repairs prior to close (especially big stuff like a room conversion or anything that requires inspections), and it's safe to say that you won't be able to get a typical FHA loan if the property doesn't pass inspection prior to close.

That said, have you talked to your mortgage broker about FHA 203(k) loans?  These FHA loans are made with the intent to provide rehab funds along with the purchase loan, so that you can make repairs after close.  For obvious reasons, the property won't need to "pass" a full FHA inspection prior to close.

Talk to a broker/lender about what you need to qualify (and in what condition the property must be in to qualify)...it may be your best bet...

Mike Berlay · Answer

I got pre-approval for 203(k)(primelending, maybe someone worked with this guys before?) and I found agent who dealing with foreclosed properties. For 203K they asking for 6 months mortgage payment reserves, that's another 10k. after all down and closing. money have to be on account for 2 months, gifts not acceptable. Is there any ways to include anything (fees, ect.) in loan?
          Was thinking to get some money from private lender 15k for 2 years @10%. property can be used as security.

Mike Berlay · Answer

I got your point guys. Already contacted with another lender about 203k loan. I hope to get pre-approval. Let you know..

Jon Holdman · Answer

The selling bank will have to pay the taxes before they can deliver it to you.  That's part of providing "good and marketable title."

The selling bank is extremely unlikely to let you do any work on the property before you close the purchase, even if you pay.

J Scott · Answer

Mike -
          
          The first thing to do is to find a mortgage broker that understands how to do an FHA 203(k) loan.  This isn't an uncommon loan type these days, so while not all brokers will be familiar, many will.  If yours isn't, move on to the next.
          
          Once you find a broker who is familiar, he should be able to explain it to you in much more detail.
          
          From an offer/contract point of view, you'd just include a financing contingency with your offer.  Your agent can do this for you, with help from the broker you end up working with.  There's nothing else special you need to do from an offer standpoint.
  
Just make sure that you have a good buyer's agent who understands REOs and a good mortgage broker who understands FHA 203(k) loans, and they should be able to walk you through the entire process.
        
          Keep in mind, you will likely have to get contractor bids on the work you plan/need to get done, and that information will have to flow back to your broker who will handle getting those rehab funds as part of the loan.
          
          Does that make sense?

Mike Berlay · Answer

Thanks Scott for reply and all work you do on your blog. Was reading it for a long time already. 
I will ask my lender if they do 203(k), but for me it was a problem to find lender who can qualify me for regular FHA. 
I know that bank do not want do or pay for anything. 5k due taxes whos going to pay for it?
I need to know what to put in contract, so I will do all work.

How to get FHA backed loan work with REO?

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