Foreclosure/REO Questions

[Anonymous]

My husband and I found a house that we would like to buy that is an REO property.  It is in excellent condition and is priced very low for the area it is in and the condition it is in.  It has been empty for a year and when it was 1st put on the market, it was listed at $317,000 and it is now lowered to $234,900.  We are really hoping to be able to get the home however we need to sell our current home first.  We owe approx. $218,000 on our current mortgage and we listed our house for $237,500.  Our realtor figured we would need around $231,000 for our house in order to pay all fees and break even.  Hopefully we will get more but who knows, we haven't had any offers yet but we've only had our home on the market for one week.  If we only get the $231,000, then we won't get any extra money for the down payment.  We will probably go FHA and scrape up what we need for down payment, but my question is if we purchase this REO property and it appraises for over the $234,900 (the asking price), is there anyway for us to utilize that equity when buying the home?  I'm not sure if my question is making sense or asking it correctly but I guess if it is appraised over 20% of the asking price, can we use that at all to our advantage?  Thx in advance for any help!

[ShanetheMortgageMan]

With an FHA loan, the lender uses the lower of the purchase price or appraised value to determine what mortgage amount you can qualify for - so a home appraising for more than the purchase price won't help you in that situation. 

If you were using USDA financing (100% financing in rural areas/rural towns, cannot make more than a certain amount of income - see that link for details) then you could use the appraised value to finance the closing costs in - so on a $234,900 sales price, if the home appraised for $240,000, you could use the $5,100 difference to finance your closing costs.  USDA financing is the only type of loan that does that.

Now if your home will appraise for a lot more than you are purchasing it for, it may be possible to refinance right afterwards and use that equity in the home to prove you have a lower loan-to-value, perhaps even 20% equiy, and you can refinance into a conventional loan and not have to pay the monthly PMI like you'd have with the FHA loan.  If your credit scores are good, you may also want to consider buying the home with conventional financing instead of FHA - have a loan officer run both scenarios for you.

[Anonymous]

Shane - Thx for the info!  We make too much for the USDA financing so that will not be an option for us.  But buying and then refinancing right after might be a good option for us.  Thx again!

[ShanetheMortgageMan]

You are welcome!