7 Steps to Buying Foreclosed Homes
Prior to the mortgage crisis of 2007–2009, purchasing a foreclosure was difficult. You have to either make the trip to courthouse auctions or sift through a lot of court documents. However, the situation worsened over the course of the mortgage crisis. The enormous increase in foreclosed properties clogged the system and changed how foreclosed homes are sold.
Today, purchasing a foreclosure is very similar to purchasing any other home. There are still many deals available even though the number of foreclosures is nowhere near its peak from the late 2000s. Here are the five steps for purchasing a foreclosed home.
Disclosure: This article was paraphrased from another article on Fortune Builders and repurposed for educational use. It’s designed to encourage people to seek professional financial advice through our short Finance Quiz. You can access the original article link at the bottom of this page.
Definition of a Foreclosed Home
The bank places a lien on your property when you sign a mortgage, giving them the right to seize your home if you stop making your regular payments.
A procedure known as foreclosure is started by the bank when a homeowner is in arrears on their mortgage. In a foreclosure, the bank acquires ownership of the property when a judge orders the homeowner to vacate. After then, the bank can sell the asset to recover its losses.
A good deal can be found on a foreclosure. Banks frequently agree to sell below market value in order to swiftly sell the property. Repairs, upkeep, and taxes become their responsibility the longer they hold onto it. Nevertheless, purchasing a foreclosed property has its own risks and difficulties.
What Happens in a Foreclosure?
As we previously established, foreclosure is a legal procedure that follows a set of predetermined processes. Here is the procedure in action.
Notice of default: A homeowner enters payment default when they miss a payment. The entire mortgage enters default after several missed payments. Usually, this occurs 90 days later. The lender will now issue a formal letter known as a “notice of default.” The homeowner is formally informed that they are in default and at risk of foreclosure. The homeowner will have a set amount of time to make up the difference or arrange a payment schedule, depending on the conditions of the mortgage and state legislation. If they can’t, the foreclosure process continues.
Notice of Trustees Sale: The bank must publish a formal notice in the newspaper before taking ownership of the property. Additionally, they must register with the county. There is a chance to learn more about the sale thanks to the notice and the public record. But these days, searching online is the most straightforward approach to find a listing.
Trustee’s sale and subsequent listing: The bank will make an effort to sell the property in a public auction at a specific date and time. If no purchasers come forward, the bank will have a real estate agent list the property. The majority of homebuyers will make their purchases at this point.
Seven Steps For Purchasing A Foreclosed Property
You want to purchase a foreclosure but are confused of how to proceed. At first, it could appear intimidating. However, it doesn’t really differ much from the typical process of purchasing a new home.
Nevertheless, being aware of what you’re getting into is usually helpful. Let’s discuss the procedure.
1. Find a Method of Purchase
First and foremost, you must conduct research. There are numerous ways to buy a foreclosure, and not every one of them is suitable for everyone. Here are the most popular techniques.
Investing in a Short Sale
When homeowners are about to go into foreclosure, they could decide to sell the property instead. They will be able to repay the bank in this manner, and the foreclosure will not appear on their credit report.
Since the bank hasn’t yet filed for foreclosure on the property, this isn’t really a foreclosure sale. However, the homeowner will still require the bank’s approval. Since the bank won’t agree to wait for the sale to conclude for months on end, the sale also occurs more quickly.
The home often sells for significantly less than market value because of the expedited schedule. To avoid the trouble of a foreclosure, the bank might even consent to a transaction that is conducted at a loss. For instance, if a homeowner owes $200,000 on a home, the bank may agree to a sell for $185,000 to settle the debt.
Historically, purchasers have bought foreclosures at auction. The auction may be conducted by a bank, a third-party trustee, or even the county courthouse, depending on the circumstances. The finest bargains can be found at auctions, and you can leave with a title in hand the same day.
However, there are some undeniable disadvantages. First of all, the title may still be subject to a lien. The government might have a tax lien, for instance, if the previous owner owed taxes. In that instance, in order to achieve complete ownership, you would need to pay the back taxes.
You must also have cash on hand when attending an auction. Additionally, you won’t have the chance to have a proper appraisal performed, leaving you working with scant information.
Search listings for the notation “REO,” which stands for “real estate owned,” to identify bank-owned foreclosures. These are foreclosed properties that the bank now owns after failing to sell at auction. REO homes are more expensive than auction properties yet have some important advantages.
One benefit is that you’ll have enough time to conduct a thorough inspection. The bank will also have settled any liens and evicted the homeowner, among other things. This greatly streamlines the purchasing procedure.
Purchasing from the government is comparable to purchasing a home from a bank. The US Department of Housing and Urban Development owns the properties, which is the difference.
Despite being inexpensive, HUD foreclosures are sold “as is.” The government will hardly ever consent to make any pre-sale repairs.
2. Establish Your Home Purchase Budget
It’s crucial to budget for your foreclosure, just like you would for any other purchase. Likewise, avoid believing internet urban legends. Yes, you can find homes for just one dollar. However, they will come with years’ worth of back taxes on real estate and will need tens of thousands or possibly hundreds of thousands of dollars in repairs.
Instead, focus on your monthly income and the debts you are currently paying. Mortgage lenders often only approve applicants whose monthly loan payments are 43% or less of their income. Budget for your mortgage properly.
3. Work With A Realtor
Real estate owned (REO) agents are typically in charge of managing foreclosed homes. REO agents operate differently from ordinary real estate agents and typically avoid dealing with prospective homeowners directly.
Finding a real estate agent with experience working with REO agents is preferable. Find a real estate agent that specializes in foreclosures if at all possible. They will be most equipped to see you through the process without encountering any major obstacles.
4. Getting Preapproval
Whether you’re purchasing a foreclosure or a more conventional house, getting preapproval is a smart move. The bank will perform a credit history check, confirm your income, and make you a tentative mortgage offer throughout this phase. You’ll then be able to calculate exactly how much house you can afford.
Additionally, having preapproval as a buyer makes you stand out. Whether or not you are eligible for a mortgage is not a concern for the bank. Since they already know you can secure a loan, they’ll be eager to get started right away.
This is particularly valid in the case of foreclosures as the bank has already suffered a loss. Selling the house to a buyer who cannot afford it is the last thing they want to do.
5. Perform An Inspection of the Home
You must be aware of what you’re purchasing before making a formal offer. At an auction sale, such is not possible. However, ordering an inspection makes sense if you’re purchasing a government or REO home.
If there are any issues with the house, an inspection will reveal them. An experienced inspector will visit the property and mark any items that require maintenance or replacement.
An appraisal is a less thorough evaluation that your lender needs. The appraiser will assess the asset to determine its worth. Since the property is a loan, your lender doesn’t want to overpay for it.
6. Make An Offer
Your method of purchasing the house will determine how you make an offer. Your real estate agent will have to present the offer to the homeowner if it’s a short sale, who will then have to obtain authorization from their bank.
Your representative will present your offer to the REO agent for a REO property. Along with any other offers, the REO agent will deliver this one to the bank. Following that, the bank will select the best offer and notify your agent if yours was chosen.
7. Finalize Your New Home Purchase
Examine the appraisal and inspection reports, then determine if you really want to proceed. You’ll be prepared to close if the house satisfies your lender’s requirements. If not, they won’t approve the loan until you do the repairs. You can follow the steps with the help of your real estate agent, and you’ll soon be sleeping in your new house.
Advantages of Purchasing a Foreclosure
• Better prices: Compared to comparable properties in the same neighborhood, foreclosed homes are almost always more reasonable. This is so because the bank does not engage in the business of real estate ownership. They see a home as nothing more than an ongoing expense that they wish to get rid of as soon as feasible.
• Standardized loan alternatives: The financing options remain the same, even though the purchasing process for a foreclosed home is a little different. You can obtain an FHA, VA, or USDA loan unless you are bidding with cash at an auction. These loans have far lower expenses than a typical mortgage. Just be aware that the house must adhere to basic standards since they are government-backed. Before approving a loan, the government will demand renovations if the property is not in livable shape.
Disadvantages of Purchasing a Foreclosure
Foreclosed homes have some advantages, but they also have some drawbacks. You might wish to remain with a conventional home purchase for the following reasons:
• Unexpected costs: When someone is facing homelessness and financial hardship, basic maintenance are usually the last thing on their mind. Homes that have been foreclosed upon may suffer from a variety of upkeep problems that are uncommon. Therefore, while you’ll save money on the first purchase, you can incur unforeseen repair expenditures later.
• Squatters: Someone might have moved in if a house has been in foreclosure for a while. However, just because they aren’t there legally doesn’t mean that getting rid of them is simple. Legal fees for evicting a squatter can run into the thousands of dollars, and the court procedure can drag on for months.
• Home is being sold “as-is”: There is a back and forth procedure involved in a typical property transaction. Before you decide to buy, you can ask the current owner to undertake repairs, or you can negotiate a lower price due of the property’s existing damage. The attitude of banks is “take it or leave it.” However, that’s one of the reasons you’re receiving a discount.
As you can see, not everyone will find foreclosures to be the best deal. As this is an as-is purchase, the lender will want to finish the transaction as soon as possible. You can, however, acquire the title to a home you otherwise couldn’t afford by learning how to purchase foreclosure properties.
Maybe it needs some work. But it’ll be all yours once it’s fixed.
Source Disclosure: This article was paraphrased from an article on Fortune Builders and repurposed for educational use. It is designed to encourage people to seek professional financial advice through our short Finance Quiz. Click below to access the original article.