Who doesn’t dream of nabbing a really good deal when shopping for a home? Maybe you’re even considering a fixer-upper, a property that would allow for some sweat equity and would, over time and with work, help you grow your wealth.
If you have been studying the real estate listings, you have probably seen some potentially excellent deals on repossessed or bank-owned properties.
While the prices may look enticingly low, when it comes to how to buy a foreclosed house, you may be in for a lot of research, a long timeline, and financing issues.
This guide can help you learn the ropes of buying this type of property, including:
• What is a foreclosed home?
• What does “foreclosure” mean?
• How can you find foreclosed homes for sale?
• How can you buy a foreclosed house from a bank or other source?
• What are the pros and cons of buying a foreclosed home?
What Is a Foreclosed House?
A foreclosed house is a home that a mortgage lender owns. Homebuyers agree to a voluntary mortgage lien when they borrow funds. If they don’t keep current with their payments and end up defaulting, the lender can take control of the property.
When the lender does so, the house is called a “foreclosed home” and can be offered for sale. Read on to learn more about the foreclosure process.
What Does ‘Foreclosure’ Mean?
A foreclosure is a home a lender or lienholder has taken from a borrower who has not made payments for a period of time. The lender or lienholder hopes to sell the property for close to what is owed on the mortgage.
Who can place a lien on a home? A mortgage lender or the IRS can. So too can the U.S. Department of Housing and Urban Development (aka HUD) for nonpayment of an FHA loan, resulting in HUD homes for sale.
A county (for nonpayment of property taxes), an HOA, or a contractor also can place a lien on a home.
Recommended: Foreclosure Rates for All 50 States
Types of Home Foreclosures
There are three main types of home foreclosures:
• Judicial foreclosures: This type of foreclosure occurs when the lender files suit (that is, in court, hence the word “judicial”) to begin the foreclosure process. This usually happens when the borrower fails to pay three consecutive payments. If the loan isn’t brought up to date within 30 days of that point, the home can be auctioned off by a sheriff’s office or the court.
• Power of sale (nonjudicial) foreclosures: Sometimes known as statutory foreclosure, this process may take place in 29 out of the 50 states. The contract in this situation allows for an auction of a foreclosed property to occur without the judicial system becoming involved, as long as certain notifications and waiting periods are appropriately observed.
• Strict foreclosures: This kind of foreclosure only occurs in Connecticut and Vermont, and usually these only happen when the value of the loan debt is more than that of the house itself. If the defaulting borrower doesn’t become current with their loan in a certain amount of time, the lender gets possession of the property directly but is not obliged to sell.
How Does the Foreclosure Process Work?
Foreclosure processes differ by state. The main difference is whether the state generally uses a judicial or nonjudicial foreclosure process. A judicial foreclosure may require an order from a judge.
• Once a borrower has missed three to six months of payments, depending on state law, the lender will post a public notice, sometimes known as a notice of default or “lis pendens,” which means pending suit.
• A borrower then typically has 30 to 120 days to attempt to avoid foreclosure. During pre-foreclosure, a homeowner may apply for a loan modification, ask for a deed in lieu of foreclosure, pay the amount owed, or attempt a short sale.
A short sale is when the borrower sells the property and the net proceeds are short of the amount owed on the mortgage. A short sale needs to be approved by the lender.
• If none of the options work, the lender might sell the foreclosed property at auction — a trustee or sheriff’s sale. Notice of the auction must be given at the county recorder and in the newspaper.
• If no one buys the home at auction, it becomes a bank or real estate-owned (REO) property. These properties are sold in the traditional real estate market or in bulk to investors at liquidation auctions.
• In some states under the judicial foreclosure process, borrowers may have the right to redeem their property after the sale by paying the foreclosure sale price or the full amount owed to the lender, plus other allowable charges.
Recommended: Home Affordability Calculator
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How to Find Foreclosed Homes for Sale
In addition to checking with local real estate companies for foreclosed homes, there are paid and free sites to search when you are shopping for a repossessed or foreclosed home.
Among the free:
• HomePath.fanniemae.com (Fannie Mae’s site)
• HomeSteps.com (Freddie Mac’s site)
• treasury.gov/auctions/irs/cat_All%2066.htm for IRS auctions
• properties.sc.egov.usda.gov/ (USDA resales)
• hudhomestore.gov (the official government website for foreclosed homes)
Paid sites include foreclosure.com and RealtyTrac.com, among others.
How to Buy a Foreclosed Home
Here are the usual steps for buying a foreclosed house. Whether you qualify as a first-time homebuyer or someone who has purchased before, it can be wise to acquaint yourself with the process before searching for a home.
Step 1: Know the Options
Buying foreclosed houses at an auction or through a lender are the main ways to purchase these homes. Keep in mind that a foreclosure is usually an “as-is” deal.
Buying at Auction: In almost all cases, bidders in a live foreclosure auction must register and show that they have sufficient funds to pay for the property in full.
Online auctions have gained popularity. You can sign up with a site to find foreclosure auctions in an area where you want to buy. Or you might research foreclosure sales data by county online, at the county courthouse, or from the trustee (the third-party foreclosure sales agent).
It’s important to look into how much the borrower owes and whether there are any liens against the property. The winning bidder may have to pay off liens. It’s smart to hire a title company or real estate attorney to provide title reports on properties you’re interested in bidding on.
Buying From the Lender: You can find listings on websites that aggregate REO properties or on a multiple listing service. When checking out the homes you like, take note of the real estate agent’s name. Banks usually outsource the job of selling foreclosed homes to REO agents, who work with standard real estate agents to find a buyer.
REO listings are often priced at or below market value. Also good to know: The lender usually clears the title and evicts the occupants before anyone buys a foreclosed home.
Looking at Opportunities Before Foreclosure: If the lender allows a short sale, potential buyers work with the borrower’s real estate agent and the lender to find a suitable price.
With pre-foreclosures, when borrowers have missed three or more mortgage payments but still own the home, the lender might work with them to avoid foreclosure. Another scenario: The homeowner might entertain purchase offers, whether the home is listed or not.
Step 2: Hire a Real Estate Agent
It’s a good idea not to go with just any agent, even if you like them and have used their services for a standard home purchase, but to find an agent who specializes in foreclosure sales.
That agent can help you search for a home, understand the buying process, negotiate a price, and order an inspection. Your offers might be countered as well, and an agent can help you figure out the best next step.
An agent can also help you understand the market in general and ways to smooth your path to homeownership, such as programs for first-time homebuyers.
Step 3: Find Foreclosures for Sale
As mentioned above, there are paid and free sites where one can scan for homes. Some divisions of the government offer foreclosed homes, as do some lenders.
Also, there are real-estate companies that specialize in these properties and can help you with your search.
Step 4: Get Pre-approved for a Mortgage
If you want to act fast on buying a foreclosed home, you’ll want to get pre-approved for a mortgage. Pre-approval tells you how much money you are eligible to borrow and lays out the terms of final approval on a mortgage in a pre-approval letter.
Pre-approval may help you compete with the all-cash buyers who are purchasing foreclosures. Bonus: As you move through this step, you are also likely to learn important home buying and financing concepts, like loan-to-value (LTV) ratio.
(If you are looking into repossessed properties, owner financing, or a purchase-money mortgage, will not be an option.)
Step 5: Get an Appraisal and Inspection
Buyers of REO properties would be smart to order a home inspection. A thorough check-up can document flaws and help you tally home repair costs.
An REO property appraisal usually consists of an as-repaired valuation — the market value if the property is repaired, compared with comps — and an as-is valuation. Some lenders also ask for a quick-sale value and a fair market value.
You can challenge the results of an appraisal if you think the figures are off, and you can hire another appraiser for an independent assessment.
Step 6: Purchase Your New Home
If you decide to move forward, contact your mortgage lender to finalize your loan. Submit your offer with the help of your real estate agent. If your offer is accepted, you will sign a contract and transfer ownership. You may be required to pay an earnest money deposit.
The certificate of title may take days to complete. During that time, the original borrower may, in some states, be able to file an objection to the sale and pay the amount owed to retain their rights to the property. This is called redeeming or repurchasing a home, but it rarely happens. Nevertheless, it’s a good idea to not dig in and start any work on the property until you receive the certificate of title.
Benefits of Buying a Foreclosed Home
Buying a foreclosed home can be a great deal for a buyer who sees the potential, is either handy or budgets realistically for repairs, and knows the fixed-up value. Some points to consider:
• Not all foreclosed properties are in poor shape, as you might expect. If a homeowner dies or has a reverse mortgage that ends, a home that was well maintained may be returned to the lender.
• REO properties rarely have title discrepancies. The repossessing lender has extinguished any liens against the property and ensured that taxes were paid.
• It can be possible to negotiate when buying REO properties. You could ask the lender to pay for a termite inspection, the appraisal, or even the upgrades needed to bring the property up to code.
Risks of Buying a Foreclosed Home
Buying a foreclosed home can be complicated. The process is governed by state and federal laws. Take note of these possible downsides:
• Some foreclosed homes have indeed been sitting empty and may have maintenance/repair issues, necessitating that you have cash available to get the work done.
• Because many REO properties have sat vacant and most are sold as-is, financing can be a challenge. See below for more details.
• Many people, especially first-time home buyers, think foreclosures are offered at a deep discount, but even low-priced homes might get multiple offers above the asking price from buyers eager to snap up a fixer-upper. You might find yourself tempted to pay more than you had expected just to close the deal.
What Are Financing Options for Foreclosed Homes
When it comes to financing the purchase of a foreclosed property, here’s what you need to know:
• Some sales may be cash-only. If you don’t have access to the amount needed, it’s smart to sidestep looking at these kinds of auctions.
• If the home is in livable condition, you may be able to get a conventional or government-back mortgage loan.
If you are planning to finance the purchase of a repossessed home, consider this:
• Fannie Mae dictates that for a conventional conforming loan, the home must be “safe, sound, and structurally secure.”
• For an FHA, VA, or USDA loan, the home must be owner occupied (that is, not a multi-family home where you will rent out all units) and in livable condition, with a functional roof, foundation, and plumbing, electrical, and HVAC systems, and no peeling paint.
• A standard FHA 203(k) loan includes the purchase of a primary house and substantial repairs costing up to the county loan limit. But relatively few lenders offer these loans. Also, the application process is more labor-intensive, and contractors must submit bids and complete paperwork. Mortgage rates are somewhat higher than for standard FHA loans.
Who Should Buy a Foreclosed Home
Buying a foreclosed home is usually best for people who are prepared for a lengthy and potentially expensive process to buy a home at a good price.
• You will need to do considerable research to find available homes and know how to make an offer.
• You will likely face a significant amount of paperwork and time delays.
• Having cash reserves to pay for repairs and deferred maintenance issues is important, as well as dealing with unpaid taxes and liens on the property.
Who Should Not Buy a Foreclosed Home
A foreclosed home may not be the right move for someone who is under time pressure to move into a new home.
It can also be a problematic process for those who don’t have a good amount of cash set aside to pay for rehabilitating a property that has been sitting empty or to take care of overdue tax bills and liens.
Buying a foreclosed home requires vision, risk tolerance, and realistic number crunching. If you need financing, it’s a good idea to get pre-approved for a mortgage so that all your ducks are in a row when you spot a potential deal.
If you’re shopping for a mortgage, consider what SoFi offers. Our home mortgage loans have competitive, flexible options, and down payments as low as 3% for first-time borrowers or as low as 5% for all other borrowers.
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What are the disadvantages of buying a foreclosed home?
Disadvantages of buying a foreclosed home can include the amount of research involved, the considerable amount of paperwork and potential delays, and the cash often required to make repairs, pay back taxes, and remedy liens.
How are repossessed houses sold?
Foreclosed homes are often sold at auction, by a lender, or by a real estate company (often ones that specialize in such repossessed properties).
How long does it take for a repossessed house to be sold?
Depending on the state and the specific property, the sale of a foreclosed house may take anywhere from a few months to a few years.
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