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Buying A Foreclosed Home: A Complete How-To Guide

Erica Gellerman4-Minute Read
September 04, 2020

When you borrow money to purchase a home, you usually do so with a secured loan. A secured loan gives the lender an option to collect and sell your home to pay off the outstanding debt if you default on your loan payments. The process of doing this is called foreclosure.

When the bank or mortgage lender puts the foreclosed home back up for sale, home buyers have the opportunity to purchase the foreclosed home at a bargain price.

Buying A House In Foreclosure

Buying a house in foreclosure requires a few extra steps in the home buying process. However, it could result in you owning your dream house at a lower cost.

Foreclosed homes are typically sold at lower costs because the bank or lender would prefer to sell the property as soon as possible. But because you’re buying from a bank or a lender, the purchase process might be a little different from buying a home from an individual.

Types Of Foreclosed Homes

Before learning how to buy a home in foreclosure, it’s important to understand the different types of foreclosed homes. There are two types:

  • Bank-Owned: When the house is in the early stages of the foreclosure process after the previous owner has stopped making mortgage payments. The foreclosed property is then put up for auction.
  • Real Estate Owned (REO): The foreclosed home was not bought at auction and the bank or lender is now selling through traditional means.

How To Buy A Foreclosed Home

While the process and terminology involved in purchasing a foreclosed home are a little different, many of the steps involved are similar to the normal home buying process.

Get Preapproved

Some foreclosed homes come with the requirement that you to make the purchase entirely in cash. But, there are some foreclosed homes that can be bought through traditional financing, too. If you’re looking at foreclosed properties that don’t require an all-cash purchase, you’ll need to acquire a preapproval letter for when you make your offer, just like 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 helps you to see just how much you’ll be able to borrow so you can adjust your budget expectations.

Find An Agent

It’s a good idea to work with an experienced real estate agent who knows how the foreclosed home buying process works. They 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 and an experienced real estate agent can help you navigate them.

Make Your 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 an unrealistically low offer may end with yours being rejected. An experienced real estate agent can help you understand what a competitive offer for the area is.

You may also want to make 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 negotiate the purchase price.

Get A Home Inspection

As with any home purchase, it’s important to get a home inspection done to assess any damage or potential repairs. Get an inspection done by a reputable inspector and make sure you read everything thoroughly.

Be Financially Prepared

Buying any home will likely come with unexpected costs and repairs. Make sure that you have money set aside to handle the unforeseen costs. And, if your inspection shows that you’ll need to make repairs or renovations to the property, make sure that you’ve properly budgeted for those.

Pros And Cons Of Buying A Foreclosed Home

Buying a foreclosed home isn’t right for everyone. Here are some of the pros and cons to consider when deciding whether this purchase route is right for you.


  • Price: The home has a lower price than others in the area because the lender can only profit upon a sale.
  • Title Process: Title is cleared by the bank or lender.
  • Loan Options: Various government-backed loans are available if the property is in livable condition (e.g. VA, FHA, USDA).


  • Potential Maintenance Issues: The home is sold as-is and could have maintenance issues the previous owner didn’t take care of.
  • Can Take More Cash: If buying at an auction, you may have to pay the full bidding price without a mortgage loan.
  • Longer Closing: The closing process on a foreclosed home can be slower than a normal home purchase.

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 foreclosed home even with a bad credit score. 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.

Should I 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’re thinking of buying a home, take some time to read more helpful home buying tips.

Get the right home loan for you.

Erica Gellerman

Erica Gellerman is a CPA, MBA, personal finance writer, and founder of The Worth Project. Her work has been featured on Forbes, Money, Business Insider, The Everygirl, The Everymom and more.