How Do You Buy a Foreclosed Home?

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Unlike standard home shopping, purchasing a foreclosed home requires you to go through an auction process or a specialized real estate agent. The heavy discount on many foreclosed homes may be appealing, but it's not without its risks. Such homes often suffer from poor maintenance, and repairing them to be move-in ready requires extra investment. In addition, foreclosed properties may require cash on hand. Before buying a foreclosed home, decide if you’re willing to make repairs and close fast in order to purchase a home below market value.

How Do You Buy a Foreclosed Home?

Shopping for foreclosed homes is different than browsing standard real estate listings. If you’re searching online, search for “action homes” or “homes in foreclosure". You can also look on websites such as Zillow and Trulia, but these may not have all possible listings in your area.

The online public records of your county courthouse are another place to identify local properties in foreclosure, depending on your location. Local newspapers often print foreclosure listings for homes repossessed by the VA, FHA or private lending companies. Fannie Mae’s HomePath program not only lists foreclosure listings across the country, but also helps homebuyers apply for one of the agency's financing options.

If you’re unsure of how to look for properties or you can’t find any listed in your area, consider working with an experienced real estate agent who specializes in foreclosed properties. Such professionals have more access to listings in your area and will have a network of people such as mortgage and other lenders. They can guide you through the possible complexities of buying a foreclosed home.

How is Buying a Foreclosed Property Different?

Foreclosed homes are meant to be sold quickly, meaning that there's usually no room for price negotiation. Even though these homes are usually below market value, they come as-is, which leaves you responsible for any repairs. In most cases, the seller will also want you to have a preapproval letter, proving that you have a mortgage lender ready to finance your purchase. Foreclosed homes also tend to be vacant by the time they're put on the market, which can speed up the closing process.

Both the closing process and the ultimate price of a foreclosed property depend on the stage of foreclosure that the property has reached when it goes up for sale.

Pre-foreclosure: In this initial stage, the mortgage lender files a default notice that lets the homeowner know his or her property will be seized if the outstanding debt isn't repaid. This period lasts anywhere from three to 10 months, during which the homeowner can either make up the late payments or ask the bank for permission to sell the property in order to repay the mortgage.

Auction/Notice of Foreclosure: If the pre-foreclosure stage lapses and the homeowner defaults, the lender will appoint a third party to auction the seized property. Homes sold in this stage of foreclosure tend to be sold quickly and buyers are usually required to pay in cash. Most properties experience their lowest sale prices at this stage of the foreclosure process.

Real Estate Owned (REO) Property: If a foreclosed home fails to sell at auction, the home officially belongs to the lender, who will most likely hire a real estate agent to list the home. Real estate owned properties may be sold below market value, but not as low as they would list for in a foreclosure auction.

Remember that purchasing a foreclosed property isn’t considered a standard transaction. Each lender will have different requirements and processes, which may also be adjusted for each individual situation.

Requirements to Purchase a Foreclosed Property

Banks and other financial institutions may be hesitant to grant loans to people who plan on purchasing foreclosed properties. Unless you have the cash on hand, you’ll need to ensure that you secure financing before you start looking for a home. Since foreclosed properties are usually sold below their fair market value, individual listings sell quickly. Getting a preapproval letter from a lender improves your chances of reaching a purchase agreement.

Lenders often impose stricter requirements on mortgages because of the risks involved in buying a foreclosed home. Make sure you check your credit report and try to get your credit score as high as possible before approaching a lender. If you can, get a full approval from a mortgage lender instead of the typical preapproval. The income and asset verification of a full approval could give you more negotiating power in getting a loan to buy a foreclosed home.

Not all banks will finance the mortgage on a home they foreclosed on since they may view it as two different transactions. Some banks may ask you to get a preapproval letter from them before purchasing a property.

Pros and Cons of Buying a Foreclosed Home

The main benefit of buying a foreclosed home is the ability to purchase a property below market value. A homeowner looking to sell quickly to recoup their losses may be willing to negotiate a better deal. Banks are also in the same situation if they have foreclosed homes on their balance sheets: the longer they hold those properties, the more money they lose.

Furthermore, not all home buyers are willing to take on the risk of a foreclosed home. If you’re willing to do extra research and take on the challenge of renovating, you may be able to see some appreciation in the home’s value.

However, you may find a lot of competition from investors who bid on these homes to flip them for a profit. If you don’t have cash on hand or a preapproval letter, the seller may move on to another buyer who can offer a faster purchase. You cannot have any contingencies in your offer, so you’ll need to identify the risks before proceeding, including the current condition of the property. Moreover, you may have difficulty finding a lender that's willing to give you a loan for a distressed property.

Foreclosed homes may have been sitting vacant for long periods of time, which can result in maintenance issues or damage from vandalism. Also, there may be liens and other debts owed on the property which you may be responsible for. Those who aren’t careful may also end up paying more than market value once all repairs are done and debts are paid back.

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