Guide To Buying a Foreclosed Home

This guide covers buying a foreclosed home for homebuyers and real estate investors. Everyone loves a great bargain, and the discount sale prices offered by foreclosures are no exception. Benefits of buying a foreclosed home include a faster closing process – an average of 30 days from bid to completion – thanks to the bank’s motivation to sell.

Buyers that plan to renovate their homes also enjoy the ability to design their homes to fit their style and customized needs.

During federal aid and lender programs prevented or paused the foreclosure process for much of the COVID pandemic, most relief benefits have now expired, and the United States is seeing a steady rise in the number of foreclosed homes. In the following sections, we will discuss buying a foreclosed home.

Is Buying a Foreclosed Home a Good Investment?

Thanks to the influx of professional flipping shows and government-sponsored financing options created in response to the mortgage crisis in 2008, the proposition of buying a foreclosed home seems much more attainable to investors and homebuyers alike. Nevertheless, purchasing a foreclosure can be lengthy and unpredictable and carries risks you may not otherwise face when buying a house at market price. If you are considering buying a foreclosure, it’s important to understand what it is, the benefits and drawbacks, and how to differentiate between a good deal versus a money pit.

Understanding Foreclosure Basics 101 Buying a Foreclosed Home

Foreclosure is a legal process in which a bank or lender seizes a home and evicts its owners, usually due to the owner’s inability to make their mortgage payments.  Of course, the homeowner and lender will go to great lengths to avoid foreclosing.

If the homeowners and lender work together, the lender may agree to sell the property for less than the owner owes on the mortgage.

The homeowner does not want to lose their home, and the lender is disinclined to pay pricey legal fees only to end up with the carrying costs and gradually diminishing value of a vacant property. However, even when foreclosure is inevitable, the procedure is long and unfolds in three distinct stages. Each phase has its unique advantages and dangers for the buyer.

Pre-Foreclosure Process

A property officially enters the Pre-Foreclosure status when the lender notifies the owners that they intend to file a lawsuit or that it has already been filed, giving the owners one last opportunity to sell the home on their own before it is listed at auction.

Throughout much of the foreclosure process, a buyer cannot perform inspections or even tour the inside of the property before submitting a bid.

If the homeowners are successful, they may escape the foreclosure process and its detrimental impact on their credit scores and future chances of purchasing another home.  Read our post about qualifying for a mortgage after a foreclosure here for more information here.

What Pre-Foreclosure Means Buying a Foreclosed Home

Because the seller is motivated to sell the property quickly, he or she may be more willing to make repairs and lower the asking price at this phase. The lender may allow the buyer to enter a lease-purchase agreement or alternative means of assuming the mortgage.

The buyer buying a foreclosed home has many advantages at the pre-foreclosure stage, including receiving a detailed history of the property’s condition and time to obtain necessary inspections.

The seller can still pull out of the deal if their circumstances improve, and they can pay off their defaulted balance and resume mortgage payments. If the sale does go through, the seller’s inability to keep up with their mortgage implies that he or she has also likely been unable to perform regular maintenance on the home, resulting in repairs and expenses when the buyer takes control of the property.

What the Auction Means to a Buyer Buying a Foreclosed Home

Lenders are eager to get the property “off the books” and can only recoup the outstanding balance owed on the home and legal fees incurred.

At the Auction stage, the seller was unable or unwilling to sell the property, and the lender can now legally auction off the home without the seller’s consent to recover what is owed.

The purchase price is likely substantially lower than the home’s market value. Because the seller no longer has negotiating power or can resume ownership of the home, the purchase is typically much faster for the buyer at this stage.

Financing Options Buying a Foreclosed Home

On the other hand, most homes sold at auction only accept cash offers, so buyers that require financing cannot buy a foreclosed home at this stage.

Homes sold at auction are also “as-is,” meaning the bank is not required to allow the home to be inspected or disclose the property’s history to the buyer.

Finally, at this stage, the original homeowners may still live in the home, and a buyer could be forced to remove them from it legally. Some buyers offer homeowners or squatters a “cash for keys” incentive in which the buyer will present a monetary reward to leave peacefully and to help with relocation expenses, but this is up to the buyer’s discretion. Lenders may contribute to assist with the smooth sale and transition.

What Does Foreclosure Stripping Mean?

Buyers at this stage must be aware of a practice known as “foreclosure stripping.” When a home is under foreclosure, a disgruntled owner may purposefully lower its value by damaging it, removing fixtures, or performing acts of vandalism. Built-in appliances, light fixtures, kitchen cabinets, and plumbing are common fixtures to be removed or damaged during this process.

While both the lender and buyer can legally pursue the offending homeowner to recover the cost of repairs, it is an additional expense first incurred by the buyer in a foreclosure sale.

Ultimately, the home becomes a bank-owned or REO (real estate-owned) property if not sold at auction. At this stage, the lender can sell the home as a foreclosure in the open real estate market.

What the Post-Foreclosure Means to a Buyer

A post-foreclosure home is usually vacant, receives a clear title, and can be sold to buyers with general mortgage financing. Buyers can obtain inspections and negotiate the purchase price with the bank. The bank will often pay the realtor’s commission fees, lower the down payment price, and assist with closing costs.

Buying a foreclosed home that sold in “as-is” condition, and given that the foreclosure process is long, the home may have been vacant for several months.

Mold, vegetative overgrowth, pests, or squatters may be present. Furthermore, all additional liens, second mortgages, or back taxes owed on the property become the buyer’s financial responsibility. This is why a potential buyer must research the home and do a comprehensive title search before buying a foreclosed home.

Benefits of Buying a Foreclosed Home

The advantage of buying a foreclosed or bank-owned home is the significantly lower sales price. Seasoned investors are attracted to the opportunity to get a fantastic deal on the property. If they can improve the home cost-effectively, they can turn a substantial profit quickly.

Investors may have an easier time finding a foreclosure to buy because the market for foreclosed properties is frequently less competitive than the conventional housing market.

Likewise, purchasers seeking to buy a foreclosed property as a primary residence can find a home that would otherwise be beyond their budget. Even those that plan to live in the home for a few years can benefit. A study in 2019 showed that, on average, purchasers of foreclosed homes gained a 34% profit when they resold the property down the line.

Disadvantages of Buying a Foreclosed Home

The greatest drawback of buying a foreclosed home is the probability that it has been abandoned, vacant, or neglected for long periods. This “blind buy” may be a dealbreaker for some, and those willing to take this risk could spend thousands on expensive repairs.

Renovation costs aside, if you purchase the home at auction, you will need the cash to buy the home upfront.

You’ll need a lender with specialized knowledge to navigate the loan process, as it is more labor-intensive and can carry more complexities that a trained eye can help you review. If you’d like to speak with one of our experts, contact us at 800-900-8569!

Financing Options for Buying a Foreclosed Home

Unless you’re buying a home in foreclosure at the auction phase, you’ll likely need to acquire financing to fund the purchase. While the complexities of financing a foreclosed home may discourage buyers, the process is simple with the right lender. The deal might go like a typical home purchase if the foreclosed property is in good shape and you have a good credit history.

Of course, the state of the house and whether the property is being acquired as a personal residence or an investment can impact the type of loan you get.

You may even be able to use a single loan to pay for both the purchase and the renovations. A conventional mortgage can be used if the foreclosed home has no structural issues. These loans, however, are not backed by the government, and borrowers need a minimum credit score of 620 coupled with at least a 3% down payment.

Buying a Foreclosed Home Fixer Upper

You can also begin researching and vetting contractors or handymen at this stage. It is good to form these relationships now because a respected contractor may be willing to walk the property with you when you find one.

Suppose you cannot hire an independent inspector to give you a rough idea of necessary repairs and estimate your budget – all before you submit your offer.

Your loan officer should have a list of preferred general contractors that is HUD approved. Still not sure if buying a foreclosure is right for you? Talk with one of our home loan experts today! Renovation loans, such as Fannie Mae’s HomeStyle mortgage, are a popular way for homebuyers to fund the construction costs if the foreclosure is not livable at the time of purchase. However, qualified borrowers need a healthy credit score, a higher income, and a detailed construction budget.

Mortgage Options Buying a Fixer-Upper Foreclosed Home

An FHA 203(k) loan is similar to HomeStyle, but is open to applicants with a lower credit score and a smaller down payment on the property. This loan is federally insured and allows the buyer to include the projected costs of renovations in the principal loan amount. The government divides the FHA 203(k) into a Full FHA 203k loan for foreclosed properties that require significant rehab, or Streamline Loan, which funds minor repairs and smaller projects under $35,000.

Loan officers at GCA FORUMS and its subsidiary lending network recommend getting pre-approved, not just pre-qualified before you begin scouting for a foreclosure home.

The loan’s terms, type, and even the final approval amount can be adjusted later, and the pre-approval gives buyers the ability to make a solid offer before a property captures the attention of investors and flippers flush with cash. Ready to get your pre-approval for a foreclosure home purchase? See if you qualify in just five minutes by clicking here.

Understanding the Options of Buying a Foreclosed Home

Foreclosures are an ideal illustration of the phrase, “With great risk comes great reward.” Considering that last year, nearly a third of all home transactions in the United States were for homes in one of the three states of foreclosure, buying a foreclosed property is a trend growing and paying off for many savvy purchasers. Suppose you are interested in taking advantage of this unique opportunity.

You can begin purchasing a home in foreclosure by finding a reputable lender and a real estate agent with expertise with foreclosure properties and homes in distress.

You can jumpstart your mortgage approval by speaking with our team at GCA FORUMS are here. We also have several seasoned and knowledgeable real estate agents on staff, ready to work on your behalf! Then, you can begin shopping for your new home. Start with county records, MLS listings, and online real estate marketplaces like Realtor.com or Zillow.