Buying A Foreclosed Home: A Complete Guide
Holly Shuffett7-Minute Read
January 18, 2022
In the world of real estate, the word “foreclosure” can have a very negative connotation, and many home buyers may not even consider touching a house that has been foreclosed. But for others, buying a foreclosed property could present the perfect solution to finding their dream home at an affordable price.
Check out our page on foreclosures for more general information there, but if you want to learn if buying a home in foreclosure is right for you, or if you want to know how buying a foreclosed home can differ from the more standard purchasing process, keep reading.
How To Buy A Foreclosed Home
If you’re planning to enter the market soon and you think that buying a foreclosed home could present you with more options, here are the steps you can expect to take throughout this home buying process:
Step 1: Get Preapproved
Getting a preapproval is a crucial first step to buying a house, and it’s likely that the same will go for buying a foreclosed property. Unless you plan to buy your home at a foreclosure auction or are interested in a property that stipulates a cash payment, you’ll most likely still need to get a mortgage to help finance your purchase.
You’ll need to acquire a preapproval letter for when you make your offer, just like you would with a regular home purchase. A preapproval letter lets a seller know that you are serious about purchasing a property and that you have the means to do so. Plus, it can help you plan and adjust your budget expectations by allowing you to see just how much money you can borrow and have to work with.
Step 2: Hire A Real Estate Agent
Part of what can make buying a foreclosed property seem so intimidating is inexperience. If buying a home that’s in foreclosure is new to you and you don’t know anyone who has gone through the experience themselves, then it can feel like there are a lot of unknowns to navigate. Working with an experienced real estate agent can help you clear up these unknowns and go into the process with better preparation 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 an auction, you’ll need to do additional research to see what liens are outstanding on the property. Every state has unique laws regarding foreclosed homes, so an experienced real estate agent who knows your area and its regulations can be an incredibly helpful resource.
Step 3: Research The Different Ways To Buy A Foreclosed House
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 your home buying options when it comes to this unique process and what they each entail.
When buying a home through a short sale you will technically be purchasing a preforeclosure 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 that you will also need the lender’s approval on your offer, which could take some time to go through.
Buying At 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. Buying a home at an auction isn’t for everyone so let’s take a look at their pros and cons to best determine if this is a home buying option which works for you:
Pros Of Buying At A Foreclosure Auction
- Bank-owned properties sold at auction are typically sold below market value
- There’s no need to negotiate price with the seller
- Buying a home at a foreclosure auction can be an extremely speedy process
Cons Of Buying At A Foreclosure Auction
- Properties are sold as-is and may be considered distressed properties
- Most auctions only accept cash payments, which means you’ll need a significant amount of money on hand
- Expect to waive the right to an appraisal or a home inspection – auction properties usually don’t allow you to view the home’s interior before purchasing, making them a risky investment
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. 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 lender, also known as real estate owned (REO) properties will require the use of a real estate agent as most lenders won’t sell a foreclosed home directly to the individual home buyer.
Similar to auction-sold properties, REO 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
Step 4: Find Foreclosure Listings
If you’re anything like me then you’re no stranger to browsing the web to gaze at houses in your free time – and with the internet at your disposal, searching for a foreclosed home has never been simpler. But if you want to browse listings of foreclosed properties and you don’t know where to start, here’s a list to help get you started:
- HUD: The Department of Housing and Urban Development is an official government website which lists foreclosed homes. Each listing should include the contact information for a real estate agent who you can contact should a property catch your eye.
- Fannie Mae: Here you can easily search for homes in your area by inputting an address, city, ZIP code or MLS number – just be sure to check off “HomePath Listing” in your search filter to find the foreclosure properties.
- Freddie Mac: Freddie Mac’s HomeSteps® is another user-friendly way to browse listings in your local area.
- Rocket HomesSM: The Rocket Homes directory for home listings is another way to browse local properties and this resource can even specify what kind of foreclosure you’re dealing with.
Step 5: Make An Offer
Once you find a home that you like and is within your budget, it’s time to make an offer. While it’s true that you can often get a good deal on a foreclosed home, coming in with a lowball offer may end with yours being rejected. An experienced real estate agent can help you understand what a competitive offer for the area and market is so that you can still score a great deal without being turned away.
You may also want to consider making a contingent offer in order to have the house inspected before the sale is final. That way, if anything pops up that’s concerning, you have the option to rescind your offer or further negotiate the purchase price.
FAQs About Buying A Foreclosed Home
While that was a good primer on the process of buying a foreclosed home, you probably still have some questions:
Is Buying A Foreclosed Home With Bad Credit Possible?
It’s possible to buy a home with bad credit, and foreclosed homes are no exception. If you’re purchasing a foreclosed home in cash, you won’t need to qualify for a loan with a lender, which is when your credit score would normally be checked.
If you work with a hard money lender to buy the property, you’re offering a piece of the property as collateral. In that case, you may not need a good credit score to purchase the property. Note that hard money loans come with higher interest rates, shorter repayment periods, and sizable down payments.
Can You Buy A Foreclosed Home With An FHA Loan?
If you’d like to use an FHA loan to buy a foreclosed you can do so as long as the home meets the FHA requirements. Using an FHA loan to purchase a property may also be an option when your bad credit disqualifies you from a traditional mortgage.
The Bottom Line: Should You Buy A Foreclosed Home?
Buying a foreclosed home can be a good option in the right situation. While there are downsides to purchasing a foreclosed home, like the length of time required to complete the purchase and the possible cost of maintenance issues, there are pros as well. Namely, you might be able to buy a home for less money than you would if buying through a traditional route.
If you think that buying a home in foreclosure is the right solution for you on your home buying journey, consider finding a real estate agent to help you navigate the process.
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