How To Buy a Foreclosure Home or Short Sales Confidently

How to Buy a Foreclosure Home or Short Sales

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Buying foreclosure properties can be an excellent opportunity for real estate investors or those looking for a bargain on a new home. Firstly, let's define what a foreclosed home or the market value of a foreclosed property is:

What is a Foreclosed Homes, Foreclosed Properties, Real Estate Owned Properties, or Bank Owned Properties?

Foreclosed homes or foreclosed properties are properties that were repossessed by a lender after the previous struggling homeowners were unable to keep up with mortgage payments.

These homes are often sold at a discounted price to recover the lender's losses. However, purchasing a foreclosed home is not as straightforward as buying a regular home.

Below we will discuss the steps involved in purchasing a foreclosed home or foreclosed properties.

Step 1: Understand the Foreclosure Process

Before you start searching for a foreclosed home or foreclosed property to buy, it's important to understand the foreclosure process.

There are two types of foreclosures: judicial and non-judicial. Judicial foreclosures require the lender to go through the court system to foreclose on the properties, while non-judicial foreclosures do not require court involvement.

Step 2: Hire An Experienced Real Estate Agent 

One reason buying a foreclosed property can seem so intimidating is being inexperienced. If buying a foreclosure home is new to you and you don’t know anyone, personally, who has gone through the process, then it can feel like there are a lot of unknowns to figure out.

Working with an experienced local real estate agent or standard real estate agents can help you clear up these unknowns and go into the process with a better understanding and more confidence.

A real estate agent who knows how the foreclosed home buying process works can help you steer clear of any issues and help educate you about different things to consider when buying a foreclosed home.

For example, if you’re buying a foreclosed home at foreclosure auctions, you’ll need to do additional research to see what liens may be on the properties. Every state has unique laws regarding real estate transactions of foreclosed homes, so an experienced real estate agent who knows your local market area and its regulations can be an incredibly helpful resource.

Step 3: Research How to Buy a Home in Foreclosure

While working with a real estate agent is typically the best way to navigate the different types of foreclosures, it’s still a good idea to understand how to find foreclosed homes in multiple listing services and know your home-buying options when it comes to this unique process and what they entail. 

Pre-foreclosures

Property is in pre-foreclosure after the mortgage lender has notified the borrowers that they are in default but before the properties are offered for sale at auction. If a homeowner can sell the properties during this time, they may be able to pay cash and to avoid an actual foreclosure proceeding and its negative effect on their credit history and future prospects.

Pre-foreclosures are typically listed in the county and local newspapers and city courthouse buildings. A good resource to look for these for foreclosure listings is Foreclosure.com.

Short Sale 

When buying a home through a short sale you will technically be purchasing a pre-foreclosure property, as it has not yet been foreclosed officially. 

A short sale occurs when a homeowner is struggling to make their monthly payments and to avoid foreclosure, they sell a home for less than what they owe on the mortgage. 

Buying a short-sale home can be an attractive option for buyers as they may be able to purchase a property at a lower price than the going market rate. Just keep in mind that for short-sale real estate, you will need to work through the homeowner’s realtor or agent, as they still own the property, and you will also need the lender’s approval on your offer, which could take some time to go through. 

Public Auction 

If you’re looking for a speedier home-buying process and are eager to close, then buying a home through a foreclosure auction might be up your alley.

Foreclosed houses sold at auction are the result of the homeowner defaulting on their mortgage or failing to pay property taxes and are typically owned by the bank or lender. 

Each foreclosure auction usually has its own rules to properly adhere to your state and municipalities, so be sure to do your research ahead of time or strategize with your real estate agent.

It can also be important to bear in mind that there are different types of auctions and thus, different etiquette to follow.

Some auctions may be open, allowing you to see how much your competition is bidding on a property, while others may have blind bidding, in which you won’t know how much others are bidding bank owned properties.

Most sellers prefer blind-bidding auctions since they increase their chances of making more money, so be sure to consult with an expert to ensure that you don’t wind up overpaying.

Buying From A Bank Or Lender 

Foreclosed homes owned by a bank or mortgage lender, also known as real estate-owned (REO) properties will require the use of a real estate agent, standard real estate agent, or real estate professional as most lenders won’t sell a foreclosed home directly to the individual home buyer also most lenders or banks may already be asking what it considers to be fair market value and be unwilling to go lower.

Similar to auction-sold properties, foreclosed properties are usually sold as-is, though they come with a bit more security and peace of mind in the form of: 

• A title that has been cleared of any liens and outstanding taxes
• The ability to view the home before purchasing
• The ability to get a home inspection should you want one

Buying a Government-Owned Property

Considering the purchase of government-owned foreclosure properties can be a strategic move. These properties share similarities with bank-owned or lender-owned homes. Government agencies such as the U.S. Department of Housing and Urban Development (HUD), Fannie Mae, and Freddie Mac typically acquire ownership of homes when owners default on mortgage loans insured by the federal government.

For instance, if homeowners fail to make payments on a home financed with an FHA loan, HUD assumes possession of the foreclosed property. Subsequently, HUD lists the property for sale, allowing potential buyers to submit offers.

It's important to note that government-owned foreclosures are generally sold "as is," meaning any necessary repairs become the buyer's responsibility. However, in certain cases, the government may address structural needs before the sale, or buyers can request repairs. It's worth mentioning that you might be required to submit an offer or bid without the opportunity to view or inspect the home beforehand.

Exploring government-owned properties can present unique opportunities, but it's essential to be aware of the conditions and potential repair responsibilities associated with these types of purchases.

Step 4: Get Pre-Approved for Financing

Getting pre-approved for financing is an important step in the home-buying process, but it's especially important when buying a foreclosed home. Because foreclosed house are sold as-is, they may require repairs or renovations.

As a result, some lenders may be hesitant to provide financing for these properties.

Getting pre-approved for financing will help you understand how much you can afford to spend on a foreclosed home.

Secure a Pre-approval Letter

Obtaining a preapproval letter from a lender is a crucial step in the process. It provides you with a clear understanding of your budget and prevents you from wasting time looking at homes beyond your means. For example, if you're preapproved for a $150,000 mortgage, you can confidently focus your search on homes within that price range.

Having a pre-approval letter also enhances your desirability as a buyer. Sellers, such as banks or government agencies in foreclosure cases, prefer working with buyers who have already been vetted by a lender. By demonstrating your ability to qualify for a mortgage, you increase your chances of being considered favorably as a potential buyer.

In competitive scenarios where multiple buyers are vying for a property, sellers are more inclined to work with individuals who have already received preapproval for a mortgage. This is especially true in foreclosure situations, where creditworthiness holds particular significance. Essentially, by proving that you can secure a mortgage, you significantly strengthen your position when making an offer to the seller.

Compare Interest Rates

When it comes to both home loans and securing a mortgage, it's wise to explore multiple lenders and compare rates and loan fees. Instead of settling for the first lender you come across, take the time to find the one that offers the lowest interest rate and most favorable terms.

If you receive preapproval from one lender and intend to purchase a bank-owned property, that specific bank or lender may request that you obtain preapproval through them. This is typically done to verify your eligibility or to seize a selling opportunity. It's important to note, however, that you are not obligated to proceed with that lender. You can still utilize your preapproval from your original lender to qualify for the bank-owned first home loan.

Apply for Final Approval

Once you have found your ideal home and your offer has been accepted by the seller, it is time to apply for full approval. If you have already obtained a preapproval from a mortgage lender, the process of applying for full approval with the same lender becomes more streamlined. However, the lender may still require you to submit recent pay stubs, tax returns, and W-2 forms to complete the final approval process.

During this stage, the lender aims to ensure that your financial situation has not significantly changed since you received your preapproval. By carefully reviewing your financial documents, they can verify that everything remains in order, allowing them to grant you full or final approval.

Step 5: Conduct a Home Inspection

Once you've found a foreclosed home that you're interested in, it's important to conduct a home inspection. Foreclosed homes are often sold as-is, meaning the previous owner may not have maintained the property properly. A home inspection will help you identify any issues with the property before you make an offer.

Inspecting a Bank or Government-Owned Home

When purchasing a bank-owned or a government agency-owned home, it's important to understand the inspection process. In most cases, banks or government agencies allow for an inspection contingency as part of the offer. This means that after your offer is accepted but before the sale closes, you have the opportunity to order an inspection. During the inspection, a qualified professional will thoroughly examine the property, assessing everything from roof leaks to potential foundation issues.

Once the inspection is complete, you will receive a detailed written report outlining the inspector's findings. This report is crucial in making informed decisions about home purchases. If the inspection reveals significant problems or concerns, you may have the option to walk away from the sale. However, it's important to note that foreclosed homes often provide little room for negotiation, regardless of the inspection results.

Keep in mind that foreclosed homes typically require additional investment in repairs. To gain a better understanding of the home's current condition, it's helpful to determine how long it has been unoccupied and whether the previous homeowner maintained routine maintenance.

Additionally, it is recommended to check with your local building department to inquire about any open building permits that could potentially cause issues after the closing.

Inspecting an Auctioned Property

The process of buying a foreclosed home at auction is notably different, as you typically don't have the opportunity to schedule a home inspection or even enter the property before making a purchase.

This inherent lack of inspection poses greater risks when purchasing a home through the auction process. While auctioned homes may come with lower prices, the absence of a home inspection means that potential problems may only be discovered after you have become the owner.

It's important to approach auctioned properties with caution and be aware of the inherent risks involved. Understanding the limitations of the auction process can help you make an informed decision when considering a purchase.

Step 6: Make a Competitive Offer and Close the Sale

After you've conducted an inspection, you can officially make an offer on the foreclosed home. Keep in mind that the lender may receive multiple offers on the property, so it's important to make a competitive offer.

You may want to work with a real estate agent who has experience in buying foreclosed homes to help you navigate this process. 

If your offer is accepted, you'll need to close the sale. This will involve signing a purchase agreement and transferring the funds to the lender.

Once this step is complete, you'll be the proud owner of a new home.  

Considering risks of buying a Foreclosed Home, Foreclosed Properties or Government-Owned Property.

Buying a foreclosed home can be a great opportunity to purchase a property at a discounted price. However, it's important to understand the foreclosure process and take the necessary steps to ensure that you're making a worthwhile investment property.

By researching the market value of foreclosed homes, getting pre-approved for financing, conducting a home inspection, making a competitive offer, and closing the sale, you can successfully buy a foreclosed home.

Already on the search for a foreclosed home to buy? If you’re not sure how to budget your monthly income for a mortgage, use our mortgage calculator to estimate how much principal and interest you’ll pay each month.

FAQs on How to Buy a foreclosed home

1. What are closing costs?

   Closing costs refer to the fees and expenses that buyers and sellers incur during the real estate transaction. These costs typically include charges for appraisal, title search, attorney fees, insurance, and taxes. It's important to budget for these costs as they can vary depending on the purchase price and location.

2. How is the asking price determined?

   The asking price of properties are set by the seller or listing agent based on factors such as market conditions, comparable sales in the area, properties condition, and desired profit. Buyers can negotiate the price through their offer and the seller may choose to accept, reject, or counter the offer.

3. What is a down payment?

   A down payment is a percentage of the total purchase price that buyers pay upfront as their initial investment in the properties. It is typically paid in cash and the remaining amount is financed through a mortgage. The size of the payment affects the loan amount, interest rate, and monthly mortgage payments.

4. Who are the former owners of the properties?

   The previous owners of a property are the individuals or entities who previously owned and occupied the home before it was sold or foreclosed upon. It is important to gather information about the previous owners, their circumstances, and the property's history to make informed decisions during the purchasing process.

5. What is a second mortgage?

   A second mortgage is a loan that homeowners take out using their home as collateral, in addition to their primary mortgage. It allows homeowners to access the equity they have built in their properties. Second mortgages can be used for various purposes, such as home improvements, debt consolidation, or major expenses. It's crucial to understand the terms, rates, and repayment terms associated with the next mortgage.