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Buying a foreclosed home is a great way to purchase a property below market value. Whether you want to take advantage of an investment opportunity or buy a new home to live in, foreclosed properties can offer more bang for your buck.
But foreclosed homes can come with risks.
If you’re interested in the potential rewards of purchasing a foreclosed home, we’ll navigate the pros – and cons – of these properties and help you find foreclosed homes at bargain prices.
What Is Foreclosure?
Foreclosure is a legal process that happens when a borrower has defaulted (stopped making payments) on their mortgage loan, and the lender repossesses the home.
Once a loan is in default status, the lender has the right to seize the property to recover as much of the remaining loan balance as possible.
How To Buy a Foreclosed Home
If you’re thinking about buying a foreclosed home, taking the right steps can help streamline the process and get you to the closing table:
1. Find the right real estate agent
It’s important to recruit a REALTOR® or real estate agent to help you with the buying process. An experienced real estate agent can assist you by:
- Helping you find foreclosed properties
- Knowing the market and confirming when a foreclosure is reasonably priced
- Knowing state rules and regulations around foreclosures
- Having insight into foreclosures before they go on the market
2. Get mortgage preapproval from a lender that works with foreclosed homes
Unless you buy a foreclosed home through an auction, you’ll probably need to apply for a mortgage to fund your purchase.
The condition of the home can impact your ability to get a mortgage. If there’s serious structural damage, like a gaping hole in the roof, lenders may not issue a loan. On the other hand, if it’s in livable condition, you may not have much trouble.
Financing options for government-backed foreclosed homes
There are many government-backed options for financing a home, including:
- FHA 203(k) loans
- Fannie Mae HomePath® Ready Buyer program
- Freddie Mac HomeSteps® program
Once you have a loan in mind, you can move forward with the buying process.
3. Get your foreclosed home inspected and appraised
Like any other home purchase, it’s important to get a foreclosed home inspected and appraised before you move ahead with the buying process. (Remember, if you’re buying at an auction, you likely won’t have the option of getting the home inspected or appraised.)
After reviewing the inspection and appraisal reports, ask yourself if the necessary repairs fit within your budget and if it’s still worthwhile to buy the home. If everything looks good, double-check to make sure you have the funds to close on the home and make needed repairs.
4. Secure your new property
Once the appraisal and inspection are complete and you’ve decided to buy, you’ll continue the closing process with your lender. How long does it take to close on a house? That depends on the situation, but you can expect a foreclosure to take a little longer than a typical sale.
Advantages and Risks of Buying a Foreclosed Home
Like any other home purchase, there are pros and cons to buying a foreclosed home:
PROS of buying a foreclosed home👍
Foreclosure homes are usually sold below market value, which means you may be able to snag a great deal. Most buyers of foreclosed homes will tell you the primary benefit of buying a foreclosed home is that your dollar goes further than it would with a standard property.
As long as you’re not buying at auction and the home is in livable condition, you should be able to take advantage of several loan options, including:
CONS of buying a foreclosed home👎
The previous owner of the foreclosed property may have neglected the home for months or years. If the home fell into disrepair, it may be in dire need of serious rehabilitation by the time you close. And rehabbing a home can be very expensive. Foreclosure homes are sold as-is, so you may need to brace yourself for potential problems.
You may see the physical defects of a foreclosed house that wasn’t properly maintained. But what you may not see or know about until after the title search are the potential liens and back taxes. Hidden title issues can be costly, time-consuming challenges you may need to tackle as the new owner.
Everyone wants a great deal on a home – this is why real estate investors often flock to foreclosure homes.
Competition among buyers looking at foreclosure homes can be fierce – especially in a tight housing market where sellers have the upper hand – so be prepared to “duke it out” with other buyers.
How To Find Foreclosed Homes
Home buyers can purchase a foreclosure in many ways, including during preforeclosure, as a short sale, in an auction, through a real estate agent or from a federal agency.
To find foreclosure properties for sale, you must know where to look. Sometimes it may not be clear which homes are foreclosure properties.
The best ways to find foreclosure homes for sale are to consult a real estate agent who has experience with foreclosed properties or visit the Homes For Sale page on the Department of Housing and Urban Development (HUD) website.
FAQs about buying a foreclosed home
You can try to find a foreclosed property that will attract less competition by contacting a bank directly, purchasing a home in preforeclosure directly from the homeowner or looking into alternative auctions, like a sheriff’s auction or a private auction.
As long as the home is in livable condition and you meet the loan’s requirements, you can use a conventional loan, VA loan, FHA loan or USDA loan to buy a foreclosed home.
Foreclosed homes are sold as-is, which could add up to costly repairs you’ll need to make. Also, the potential of purchasing a home below market value is tempting, so there may be a lot of competition from other buyers for foreclosed properties.
Buy Low and Aim for Low Risk
Buying a foreclosed home can be a savvy financial decision if you can find a property in decent condition at a reasonable sales price. Understand what you’re getting yourself into – and take your time. Exercising patience throughout the process could be the difference between buying a home with potential or a buying money pit.
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