What do you know about purchasing a property in foreclosure? Heck, what does foreclosure even mean?! There are stipulations around buying a foreclosed property including that it may be too difficult or confusing to do, may be hard to find, or the properties are always in need of expensive repairs. Not true! Let’s take a look at buying a home in foreclosure 101 to see if it’s the right decision for you.
What is foreclosure?
Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments by forcing the sale of the asset. In other words, property in foreclosure has been repossessed by the lender, which could be a private party, the government, or a bank, because the money owed to them wasn’t being paid back as agreed. The lender will try and force a sale to recoup all or even some of the money owed.
How does foreclosure happen?
The most common reason foreclosure happens is because owners default on their loans by either not paying their property taxes or their monthly mortgage payments. Don’t let this happen to you! DomiDocs HomeLock™ offers scanning, monitoring, and alerting 24/7/365 for 200+ data points including missed payments.
What’s the price advantage of buying a foreclosed home?
If we’re talking about prices alone, recent statistics show that the average price of a new home in America was $391,900 as compared to a repossessed property, also known as real estate owned (REO) property by lenders, was valued at $180,250.
Who buys foreclosed homes?
Investors are drawn to the bargain basement prices of foreclosed homes, as are house flippers and average homebuyers looking to get into property ownership for the first time, or for those who want the best property bang for their hard-earned dollars
How long does it take to buy a foreclosed home?
The foreclosure process typically takes 18 months on average to complete (as compared to 66 days for the average home buying process, including listing and closing). So if you choose to go the foreclosure route, you’ll need to have patience.
Types of foreclosed homes
There are generally four types of home foreclosures that you’ll run into:
| Types of Foreclosed Homes | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Auctions | The goal of the bank is to sell the property as quickly as possible to the highest bidder. However, you’ll need to have all of the cash upfront (meaning you can’t finance this type of purchase), and you’ll be taking a risk in not knowing whether there’s a lien or liens on the property, nor the actual physical condition of the property as you’d be buying sight unseen. | ||||||||
| Government-Owned | When a homeowner defaults, their home could be repossessed by the applicable government lender such as the US Department of Agriculture (USDA loans) or the Department of Veterans Affairs (VA loans). Generally, homes are sold as-is, which means if there are unseen structural problems or other issues, they’ll need to be tended to before the home can be occupied. You’ll have a 30-day buyer’s advantage with a government-foreclosed property as investors can only make a bid on a home after that period. | ||||||||
| REO Foreclosures | Owned by a lender or a bank, these homes typically didn’t sell at auction or during pre-foreclosure. These as-is properties are sold through real estate agencies, whereby you’ll be told about any needed repairs upfront. | ||||||||
| Pre-Foreclosure | This is a home that’s teetering on the edge of being foreclosed. Chances are the seller is doing everything they financially can to hold onto their home before the bank comes to reclaim it. There’s generally an applicable waiting period after an offer on a pre-foreclosed home has been made, so while you think you’re going to get a bargain, the owners could come up with the cash last minute and cancel the sale entirely. But you can finance this type of purchase, as compared to an auction sale. | ||||||||
Hunting for foreclosed homes.
You can find a multitude of foreclosed homes being sold through real estate agencies, including Realtor.com and MLS.com, as well as real-estate marketplaces like Zillow and Redfin. You can also find foreclosed property listings on:
- bank websites
- Fannie Mae HomePath
- Freddie Mac HomeSteps
- US Department of Housing and Urban Development (HUD)
- US Department of Treasury
Do your due diligence on a foreclosed home before you buy.
Many times you won’t be able to see a foreclosed home before you make an offer. But if you’ve got the property address from the auction listing, do a drive-by to take a look at the exterior of the home. If it looks really bad from the outside, chances are good it’s just as bad on the inside. You can also conduct a title search on the property to check for any liens or additional mortgages in place; if the property is being offered for sale by a bank, it may already have a clear title.
Can you buy a foreclosed home without having cash upfront?
Depending on the type of home being considered, you may be able to get access to a loan through these options:
- a 203(K) loan – backed by the Federal Housing Administration (FHA), you may qualify with as little as a 3% for a down payment
- Fannie Mae HomePath – applies to foreclosed homes already owned by Fannie Mae; buyers can qualify with 3% down
- Freddie Mac HomeSteps – applies to foreclosed homes owned by Freddie Mac, with as little as 5% down
Can you buy a foreclosed home with bad credit?
Generally, the higher your credit rating, the better position you’ll be in to finance a home. If your credit is less than stellar, you can take the time to rebuild your credit score or check into obtaining an FHA loan. With a credit score of 580 or more, you may qualify to put as little as 3.5% down; if it’s between 500 and 579, you’ll be looking at a 10% requirement. However, the property being bought must meet FHA standards, which can be found on the HUD website.
Should you take a gamble on a foreclosed home?
It comes down to these 4 vital factors you’ll need to take into consideration:
- Money: do you have the cash or would you need to finance a home purchase?
- Repairs: do you have the money to conduct the required repairs and/or upgrades?
- Risk: are you willing to take a financial risk on a sight-unseen property?
- Time: how long do you want to wait to move into a new home?
Don’t let myths about buying a home in foreclosure stop you from considering the process. There is an abundance of listings, real estate agents can work with you every step of the way, and some agencies only list properties that are in good condition. Your new home could also be the bargain of your dreams!
But don’t let a missed payment put you into foreclosure! DomiDocs’ HomeLock™ provides you with 360-degree protection 24/7/365 through its scanning, monitoring, and alerting systems. If you’ve missed a payment, have an unpaid bill, or if there’s been a clerical error at the county level, you’ll be alerted to any changes so you can take care of the situation before it becomes a true-life nightmare. Read our HomeLock™ FAQs and be sure to sign up today.
For more information related to financing and foreclosures, read:
The Secrets of Refinancing Your Home with Bad Credit
Tips and Tricks to Help Win a Bidding War
Author – Connie Motz