Although foreclosures can be difficult for homeowners who lose their homes, they can offer homebuyers the opportunity to purchase these properties at an affordable price.
Homeowners who fail to pay their mortgages risk being foreclosed on. To recoup their mortgage investment, a lender will seize the property and then sell it. The foreclosure process usually begins when a borrower fails to make their mortgage payments for several months.
If the economy is in decline, you may find more foreclosure homes to purchase — and these homes are often less expensive than other properties.
This article will explain the various types of foreclosure sales and how to purchase a foreclosure home. It also explains the risks and benefits of purchasing a foreclosure home.
Types for foreclosure sales
You may picture auctions on the steps of the courthouse when you think about buying a foreclosure home. This is not the only type of foreclosure sale. There are different stages of the foreclosure process that you may be able buy a house.
You may be able, early on, to purchase a distressed house while the homeowner is still in possession. You may later work with the government or banks to purchase a home that has been seized.
These are the five most common types of foreclosure sales.
- Preforeclosure These are homes in the early stages or foreclosure. Many states require that loan servicers notify homeowners when they are at risk of losing their home. They also offer a process to assist them in getting their debts under control. To avoid long and painful foreclosure proceedings, some homeowners might be keen to sell their home at this stage.
- Short Sales A homeowner who owes more than the property’s value on their mortgage is deemed “underwater.” A lender might agree to a short sale in this situation. To avoid foreclosure, the lender may accept a home that is less than the mortgage balance.
- Sheriff’s sale – After a foreclosure has been completed, the property is often sold at a public auction by the local sheriff’s department. Some states require that lenders hire a trustee company or law firm to host the sale. These foreclosed houses are sold to the highest bidder in either case.
- Bank-owned properties Sometimes, the bank that originated the mortgage decides to purchase the foreclosed home. The bank will then attempt to obtain the highest possible price for the property on the open market within a reasonable time frame.
- Government-owned properties Similar to banks, government entities may also be able to take over real estate after foreclosures. Many homes are available for sale by the federal government, state and local governments.
How do you buy a foreclosure home
The process for buying a foreclosure home will differ depending on where you live and how the property is in foreclosure. There are common steps that you can follow to help you prepare for buying a foreclosure home.
1. Find out which type of foreclosure might be right for you
In some states, homes that have been foreclosed must be paid in cash immediately. Some states require only a small cash deposit to cover the sale price. You may have to look at preforeclosures and homes that have been repossessed if you don’t have enough cash.
2. Find out how much you can afford
You need to be able to afford the monthly payments, no matter what method you use to buy your home. You should review your monthly budget to determine how much you can afford each month to pay for your home. The rule of thumb is to not make your mortgage payment more than 28% from your gross monthly income. Include all costs associated with your mortgage, including insurance and taxes.
Let’s assume you make $72,000 per annum, which is $6,000 per month. This means that your monthly mortgage payment should be below $1,680. This can be converted into a maximum home purchase price using a mortgage calculator.
3. A real estate agent who is familiar with foreclosures should be hired
It can be difficult to buy a foreclosure. Negotiations with sellers and lenders are involved. A professional real estate agent is able to help.
To help you navigate the process, find agents who have experience buying foreclosed houses in your area.
4. Foreclosures available for purchase
You can find many resources online that will help you locate homes at various stages of foreclosure. Sites like Redfin and Zillow allow you to filter listings for foreclosures that are either in preforeclosure, or have foreclosed.
Online, you can find government-owned foreclosed properties on agency websites such as the U.S. Department of Housing and Urban Development and Fannie Mae and Freddie Mac.
5. Pre-approve for a mortgage
You will need to provide financial information to your lender in order to be preapproved for a mortgage. You will receive a conditional loan offer from your lender to borrow money up to a specified amount. Although this can provide some assurance that you will likely be approved for a mortgage after you have settled on a home, it is not a guarantee. To compare offers from different lenders, you can be preapproved by multiple lenders.
6. Offer
Once you have agreed on the price and location of the home, it is time to make an offer. You may have to bid at a public auction depending on the stage of foreclosure. Or you might be dealing directly with the homeowner or a bank. Your agent can ensure that your offer is accepted by the appropriate people.
7. Request an inspection and appraisal
After your offer has been accepted it is a good idea for the home to be professionally inspected before you commit to buying. A third-party inspector will inspect the house and make any necessary repairs. If the inspection reveals significant problems, you may be able cancel your purchase.
Homes bought in foreclosure are often sold “as is,” so you might not have an opportunity to inspect them. This can be dangerous. If you decide to go this route, it is a smart idea to save money to fix up your home.
Your lender may require that the property be appraised if you are buying the house with a mortgage. This is to ensure the property’s value.
8. Purchase your home
This could look very different depending on what type of foreclosure you are buying. A closing table may allow you to sign the same documents as a traditional sale of a home, but you might also be required to pay a cash deposit following an auction. You can get help from your lender and real estate agent.
What are the advantages of buying a foreclosure home?
There are many benefits to buying a foreclosure home.
- Lower prices Foreclosed homes are often less expensive than comparable homes on the open marketplace. That’s often because of the perceived risk of buying a foreclosed home, and the sometimes-complicated nature of doing so.
- Motivated sellers Homeowners who are in foreclosure may want to sell their home quickly to avoid financial and legal trouble. The bank or government agency now owning the home won’t be able to keep it after it has been foreclosed. Both buyers and sellers might be open to working with you, offering benefits that you won’t find on the open marketplace.
- Easy to create equity Homes that have been foreclosed may be less expensive than normal or require repairs. You may be able quickly to increase the value of the property and get a lot of equity if you are able to fix it up.
What are the disadvantages of buying a foreclosed house?
You also have to be aware of the risks involved in buying a foreclosure property. These risks include:
- Buying as is Most sellers won’t allow you to ask them to make repairs prior to the sale of your home. Once you close on the sale, you will need to complete these projects on your own. You might be surprised at the hidden costs if you don’t have the opportunity to inspect the house before you buy.
- Complex negotiations Buying an empty home can be complicated. This includes the bank and government agencies, as well as the homeowner. It can be frustrating to have to wait for approval at different levels if you are used to traditional homebuying.
- There is a lot to choose The best deals on foreclosed homes are sure to attract a lot more interest. This can cause the price to go beyond what you are willing to pay. Companies often purchase foreclosed properties as investments, which can make the competition even more fierce.
Help with financing to buy a foreclosed house
It may not be possible to obtain a private mortgage to purchase a foreclosed property depending on its condition. You may be able to get a loan from the government if traditional lenders are unwilling to approve. These programs include:
- 203 (k) loans These loans are provided by the Federal Housing Administration to assist homebuyers in financing the purchase and repair of their house. You will need to apply through an FHA approved lender for the 203(k). This program is not a loan but a type mortgage insurance.
- Fannie Mae HomePath ready Buyer(tm); Fannie Mae offers homebuyers special financing for those who are first-time buyers and want to buy a Fannie Mae owned home. The Ready Buyer program offers up to 3% assistance with closing costs.
- Freddie Mac HomeSteps (r) — Freddie Mac gives homebuyers a first look at foreclosed properties before investors can bid. Freddie Mac offers several mortgages for renovation that will help you make your home habitable.
Next steps
A foreclosed house can present risks and complications that are not usually encountered when buying a traditional home. A foreclosed house can be cheaper and offer a faster route to equity.
Before you buy a house, consider your financial goals and timeline. You may find a real estate agent, or a loan officer who has experience with dealing with foreclosed houses to help you make a decision.