If you want to buy a house that needs major repairs, your best option may be an FHA 203k loan. This loan pays for the cost of the repairs by adding it to the loan.
Qualifying for this loan is like qualifying for any other mortgage. You will need to have a job, and the lender will check your debt-to-income ratio and credit score, among other things.
#1 Explain to your FHA lender that you would like to secure rehabilitation funding in addition to the purchase loan to replace or repair the home. The FHA lender will have the knowledge to begin the necessary steps.
#2 Allow a feasibility study. This is similar to an appraisal. A feasibility study consultant evaluates properties for repair and write estimates of repair costs. The written estimates are then explained and presented for your approval.
#3 Authorize the consultant to create a work write-up. A work write-up is a repair expense itemization which can financed into the loan. Once an agreed-upon loan amount is reached, an actual appraisal will be ordered based on the work write-up. The appraisal is ordered to establish an "after improvements" value on the property.
#4 Allow the lender to submit the loan to underwriting. While the loan is being approved, home builders may submit bids to compete to complete the work on your home. When the loan has final approval, a payment is made toward the property's purchase price. The remaining funds remain in escrow until the repairs or replacements are completed. Builders may be paid during the rehabilitation process as work is completed, or they will get paid all at once when all of the work is done. All repairs must be completed within six months of the purchase date.
For more specific information about this loan and the type of repairs covered: http://directlender.blogspot.com/2010/04/203k-loan-to-finance-and-rehab-property.html