Buying a home that was sent to foreclosure is a smart move for real estate investors and first-time home buyers. A foreclosed home is owned by the lender or bank when the homeowners stop making regular payments toward their mortgage. Banks and lenders generally try to sell these homes at auctions for a much lower price so they can recoup some of their losses in less time. However, buying a foreclosed home can be risky or rewarding, because banks aren’t required to disclose the state of the house and aren’t liable for fixing any major repairs that are needed.
The process of purchasing a foreclosure isn’t much different than purchasing a traditional home. Although there’s a bit more research that goes into purchasing a foreclosed home and you need to be okay with a home needing repairs, working with a trusted real estate agent can make the process feel no different and help eliminate some stress for first-time homebuyers. Some real estate agents specialize in the local foreclosure market, so they will be better equipped to help you through the process of how to buy a foreclosed home outlined below.
Different types of Foreclosure Properties
A home that is in pre-foreclosure is usually still occupied by the current homeowners who are defaulting on their mortgage payments. The current homeowner can usually try to short-sale their home, selling it for less than what’s left to pay on their total mortgage, and in some cases, the bank will agree to take the loss to ensure a quick sale.
At a real estate auction, a trustee will coordinate the sale of a home that a bank or lender has taken ownership of after foreclosure. Auctions usually require buyers to have cash-on-hand.
Real-Estate Owned (REO) is terminology you might see when searching for a home, meaning that the bank has purchased the home at an auction and has hired a real estate company to sell the home.
These are properties that have had mortgage defaulted on, but the lender was the federal government. HUD homes fall into this category.
Determine your budget
One of the first things you should do when buying any home – whether it be foreclosed or newly built, is figure out how much you can actually spend. While the price tag of a foreclosed home is low, the home may need extensive repairs. You should calculate your debt-to-income ratio and get an estimate of how much your bills will be after the mortgage, insurance, taxes, and any repairs you may need to make. Although it’s tempting to buy a foreclosure at the top of your budget, there are many hidden costs you could run into with repairs. If you buy a foreclosed home and struggle to make the mortgage payment, you might foreclose on the home yourself.
Hire a real estate agent
Real estate agents are helpful when you’re looking to purchase a foreclosed home because they know the market and will be able to tell you if the home you’re looking at is a true bargain, or if it’s priced too high with the assumed risk involved. Real estate agents also know the specific state laws and can help navigate you through the pre-foreclosure or auction process.
Get preapproved for a mortgage
During the preapproval process for a mortgage, the potential lender will run a credit check and verify your income and debt. Once approved, you’ll know your budget for purchasing a home, so you know to avoid homes out of your price range. Sellers generally like to work with buyers who have already been approved for the mortgage because it makes the transaction easier and less likely the sale will fall through.
Although you may be preapproved for a mortgage, your lender will run another check on your finances when you try for a final approval of the mortgage, just to make sure your financial situation hasn’t drastically changed. However, it’ll be easier to apply for a mortgage after you’ve been preapproved, because a lot of the work has already been completed.
Make an offer
If you’ve found your dream home, but it’s in pre-foreclosure, your real estate agent will present your offer to the current owner. If you’re buying at an auction, the offer goes to the trustee or the attorney running the auction. You may be tempted to lowball an offer for a foreclosed home, but if the offer is too low, it could get rejected because competitive offers will pay higher than what you’re willing to. It’s essential to work with a real estate agent here, because they can guide you towards a competitive offer. Most real estate agents will work with you on drafting a contingency offer, where the sale of the foreclosure property won’t be final until there’s an inspection scheduled and completed.
Get an inspection
If you’re buying a home that is in pre-foreclosure, you should schedule an inspection once the offer is approved. Inspecting the house is important during the offer process because if the home has too many problems or costs too much to fix, you may want to pass on the house. You’ll receive a written letter from the inspector of their findings, but foreclosure homes don’t offer much wiggle room for negotiations.
However, if you’re purchasing a foreclosure property at an auction, you will generally not be able to schedule an inspection – or even step foot inside the house unless you’ve committed to buying the house. Since you’re buying the home as-is, the bank, trustees, or current owner won’t pay for any needed repairs, should any issues arise. You should always expect to spend money repairing a foreclosed home.
Buying a foreclosed home might be the best choice for you if your budget is tight, but it’s always suggested that you work with professionals throughout the process, so you don’t end up with a dud.