There are some great deals on foreclosed homes on the market today. You can find some of these foreclosure listings on Auction.com, Zillow.com, and Redfin.com. Since the housing bubble burst the U.S. has had a flux of foreclosures, where one person’s misfortune can become an investment for someone else.
Perhaps you are interested in buying foreclosure properties for a good deal on your home or a home you want to flip or turn it into a rental property or Airbnb listing. Whatever your plans are for the foreclosure property you may need a mortgage to start.
Types of foreclosures
- Pre-foreclosure: When an owner has stopped making payments and is in the process of foreclosure. In this situation, an interested buyer can offer to buy the property to the owner who is in default on their loan. This can be beneficial for the owner, who can resolve some of their credit issues with the sell.
- Short sale: Similar to pre-foreclosure, a short sale is an alternative to foreclosure and happens usually while a home loan is in default. The owner and the lender decide together that it is best to sell the property at a moderate loss than starting the foreclosure process. This helps the current owner of the home by selling the property avoid foreclosure reporting on their credit report.
- Bank-owned: When a foreclosure property is owned by the bank that holds the mortgage note. These properties can be ‘as-is’ where damages or repairs will not be considered in the loan, or ‘move-in ready’ homes that are sold at market value.
- REO (real estate owned): When the property is owned by the original mortgage lender to recoup losses.
- Foreclosure auction: If the loan is not reinstated, meaning the property owner did not pay back the loan to avoid foreclosure, the property will likely be sold at a foreclosure auction. Successful bidders often are required to pay in cash and may not have much time to research the title and condition of the property beforehand. Most auctions require cash payment at the time of purchase. Read more about buying at a foreclosure auction.
What do you need to apply for a mortgage on a foreclosed home?
There are several factors a bank or mortgage lender looks for when pre-approving the purchase of a foreclosure property. To start the process, you can download a checklist here.
Before you start collecting the paperwork for an application, the buyer should decide whether they are paying with cash or with a home loan. Paying in cash can be beneficial by allowing you to close sooner, negotiate faster, and forego the monthly loan payments. Alternatively, when you are pre-approved on a mortgage loan the buyer can hold onto their cash savings, receive yearly tax benefits and the lender is responsible for ordering appraisals and inspections for the foreclosed property. If you were to buy with cash you would be responsible for any desired appraisals and inspections on your own.
If you pursue a mortgage for a foreclosed home you may need a combination of the following before you make an offer:
- A prequalification letter from the lender or bank.
- A preapproval letter with certain documentation and consideration of your credit history.
Know the difference between prequalification and preapproval on a home loan. The prequalification can let you know how much home you can afford but it is strictly an estimate based on no supporting documents. The preapproval letter will allow you to bid on a home with the certainty of having all of your finances documented. Getting a preapproval on the foreclosure alerts the seller and real estate agent that you mean business.
What to look out for when buying a foreclosure property
Although foreclosures have a cheaper price tag than the traditional listing, they can come with a mountain of complications. In some cases, buyers who are interested in foreclosure properties may want to ‘flip’ the house for a profit. When ‘flipping a home’ you will need to assess the damage and other factors before purchasing a foreclosed home:
- Does the home have a lien against the property?
- Assess the overall repairs that need to be made.
- Will the cost of repairs be less than buying a traditional home?
- Research the ownership history of the home.
- Know the neighborhood. Consider the school district zoning, crime rate, and WalkScore.
- Visit the property in the morning, noon, and night on different days of the week.
According to Investopedia there are two financing options that are available to foreclosure home buyers where the property is in need of repairs.
Five steps to buying a foreclosure property
- Get prequalified and have a preapproval letter in hand
Start the application process with a reputable lender and find a real estate agent with experience in purchasing or selling foreclosed properties.
- Make an offer on the foreclosed home
Talk to your real estate agent and agree upon the appropriate amount needed to make your initial offer. Consider the value of comparable homes in the area and an estimate of the possible repairs needed.
- Put your offer in writing
Handle all negotiations in writing to make sure both parties understand the terms of the agreement. If you do negotiate verbally at all (not advised), follow up in writing.
- Make a deposit on the property
If the offer is accepted, you need to make a “good faith” deposit to show your commitment to the transaction. Usually it is best to have cash or a cashier’s check on hand at a foreclosure auction.
- Ratify a purchase contract
The purchase contract is a legally binding agreement between the buyer and seller describing all the terms of the transaction. Check the state rules with an attorney, real estate agent, or title company. These contacts can help you draft the purchase contract.
Each foreclosed property is different and processes will vary each time. This is a general guide to buying a foreclosed home with financing. If you have any questions or would like specific advice on a mortgage for a foreclosed home please contact me.