Sara Routhier, Managing Editor of Features and Outreach, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming worl...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Jan 4, 2013

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Yes, it is possible to buy an REO home using an FHA loan.

REO stands for “real estate owned” properties. This means that the property was once owned by a mortgage borrower, but the borrower’s lender has since taken ownership of the property. As one might imagine, these became prevalent in recent times due to the massive amount of foreclosures that occurred in the wake of the recent recession and housing market collapse.

Banks, who are the most common REO owners, are not interested in holding onto the millions of homes that have been foreclosed and repossessed in recent years. In order to make back at least some money that they lost in lending mortgages that have been defaulted on, banks will sell their properties at a greatly reduced price; sometimes as low as 50 percent of their market values.

This makes these properties a great option for prospective homebuyers looking to keep their mortgage payments low, especially when combined with borrowing an FHA loan.

Borrowers and prospective homeowners should first try and obtain preapproval for an FHA loan. You can begin the application process by filling out this application.

If borrowers are approved then they will have to pay an upfront 1 percent mortgage insurance premium along with a small monthly fee for the duration of the FHA loan’s lifetime. These loans also require a minimum down payment of 3.5 percent at the time of purchase.

In order to buy a property using an FHA loan, borrowers and prospective homebuyers would greatly benefit from real estate agent’s services. Fortunately for prospective homebuyers, a buyer’s agent’s fees are usually paid by home sellers.

Agents to the Rescue

It is wise to work with real estate agents in order to complete a home purchase. Professional real estate agents are more readily equipped to locate properties that match borrowers’ specifications.

Real estate agents can submit an offer on behalf of a homebuyer once the buyer has located and viewed a home that he or she desires to purchase.

A real estate agent can help negotiations concerning any counteroffers as well as accelerate the closing of a deal. Since these properties are highly sought, a real estate agent can greatly speed along the purchase process. 

Depending on the quality of the home and the degree to which the owner let it decline, a specific type of FHA loan—the 203k loan—may be needed.

Once a borrower’s real estate agent and seller have worked out a deal, the borrower can purchase the home and finally call themselves a homeowner.