Buying A Foreclosed Home: Pros, Cons And A Step-By-Step Guide
Miranda Crace7-minute read
October 05, 2023
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Have you ever considered buying a foreclosed home? As you might imagine, you’ll need to know what you’re looking for and how to shop for a foreclosed home. We’ll take a closer look at what it means when a home forecloses. And we’ll dive into the benefits, drawbacks and steps to buying a foreclosure.
What Does Foreclosure Mean?
A foreclosure happens when a home is seized by a lender. When you see a home listed as foreclosed, it means the lender owns it.
Every mortgage contract places a lien on a property. A lien allows a lender to repossess a house if an owner stops making the mortgage payments. Foreclosures are typically the result of a homeowner’s inability to keep up with their mortgage.
Buying a foreclosed home is a little different from buying a house owned by a homeowner.
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How To Buy A Foreclosed Home
Do you think buying a foreclosure is right for you? Here are the steps to buy a foreclosure home:
Step 1: Understand The Types Of Foreclosure Purchases
There are two main ways to purchase a foreclosure: at auction or from a lender after they failed to sell at auction. However, you can also pursue options to purchase homes on the cusp of foreclosure.
Purchase At Auction
You’ll get a home faster at auction than you would negotiating with a bank or seller. Home buyers can also buy a property significantly below market value at auction. However, most auctions only accept cash payments, which means you’ll need a significant amount of money available for the purchase.
If the auction allows for mortgage financing, make sure your initial approval is ready. However, it’s important to recognize that not all approvals are equal. We recommend applying for Verified Approval,1 where your income and assets are verified.
When you purchase at an auction, you agree to buy the home as is without an appraisal or inspection. You’re taking on a big risk when you buy a foreclosed home at auction, so speak with a real estate attorney if you’re interested in this type of purchase.
Purchase Bank-Owned Properties
You skip working with a homeowner when you purchase a property from a lender’s real estate owned (REO) inventory. The lender usually clears the title and makes sure it’s vacant before you buy the foreclosed property.
Most lenders won’t sell bank-owned properties directly to a buyer. You must talk to an experienced real estate agent to see any available properties. These homes are usually sold as-is, but you can typically view the home and order an inspection before you close.
A preforeclosure is a property in the early stages of foreclosure.
Many databases, including the multiple listing service (MLS), tag homes in preforeclosure, so assembling a list of potential preforeclosures is relatively straightforward.
You will need to look more deeply into the situation of any home listed as a preforeclosure because a database won’t offer a complete picture. The database tag just means a homeowner received a notice of default from their lender.
The home may never go on sale, or the current owner may be eager to work on selling it to you to offload the property – presenting you with a great opportunity.
Purchasing a preforeclosure can be a win-win situation. You can buy a home at a lower price while the homeowner can avoid the final stages of foreclosure.
Purchase Through Short Sale
A short sale occurs when a homeowner sells a home for less than what they owe on the mortgage. The foreclosure hasn’t been finalized. Not all short sale properties are in preforeclosure, but some are. If the homeowner still owns the home, you can work with their REALTOR® or real estate agent.
When you buy a short sale home, the lender (not the homeowner) must approve your offer. And you may spend a lot of time waiting for approval.
Step 2: Hire A Real Estate Agent
Most lenders hand foreclosed properties off to an REO agent who works with traditional real estate agents to find a buyer.
Not every real estate agent has experience working with REO agents. A qualified foreclosure agent can help you search for foreclosures, navigate your state’s REO buying process, negotiate your purchase price, order an inspection and make an offer.
Step 3: Find Foreclosures For Sale
Although your real estate agent can help you search for foreclosures, you may want to investigate for yourself. The internet has made it much easier than it used to be to find foreclosures in your area and other parts of the U.S. There are multiple sites to help you with your search. Here are three we recommend:
- Department of Housing and Urban Development (HUD): This official government website lists foreclosed homes. Your real estate agent can contact the agent listed with the property.
- Fannie Mae HomePath: You can search for foreclosure listings (called HomePath properties) by address, ZIP code or MLS number.
- Freddie Mac HomeSteps: This is Freddie Mac’s answer to Fannie Mae’s foreclosure site. It has similar functionality.
Step 4: Get Preapproved For A Mortgage
Unless you buy a home at a foreclosure auction, you’ll probably get a mortgage to fund your purchase. Once you’ve found an agent and started looking at homes, you should get preapproved for a loan. A mortgage preapproval is an initial approval that lets you know how much you can borrow for a home loan. Consider applying for multiple preapprovals to help narrow your mortgage lender search.
Step 5: Get An Appraisal And Inspection
Inspections and appraisals are crucial when buying a foreclosure. An appraisal is a lender requirement that estimates the dollar value of a property. Lenders require appraisals before they issue home loans because they must confirm they aren’t lending borrowers too much money. For a buyer, an appraisal helps confirm that you’re not overpaying for a property.
A home inspection is an in-depth look at the inner and outer workings of a property. A professional home inspector will walk through the home and write down everything that needs to be replaced or repaired. Because foreclosures typically need extensive repairs, you should insist on an inspection before buying a foreclosed home.
Sometimes, you don’t get the chance to order a home inspection or appraisal before you buy. In that case, you should only consider buying a foreclosed property if you’re skillful with home repairs.
Step 6: Purchase Your New Home
Read your inspection and appraisal results to help decide whether the home is right for you and whether you’re OK buying the home as-is. Contact your mortgage lender to finalize your loan if you have the money or skills to make any renovations. Your real estate agent will help you submit your offer and prepare you for closing.
Benefits Of Buying A Foreclosed Home
There are a few benefits of buying a foreclosed home:
- Lower prices: One undeniable benefit is that foreclosed homes almost always cost less than other homes or are listed below market value. That’s because they’re priced by lenders who want the homes off their
- Standard loan configurations: The bidding and buying process for foreclosed homes can differ from traditional homes. But you may be able to get a loan to purchase a foreclosed home as long as the property isn’t being sold at a cash-only auction. You can get a conventional loan or a government-backed Department of Veterans Affairs (VA) loan, Federal Housing Administration (FHA) loan or S. Department of Agriculture (USDA) loan if the home is in livable condition. Government-backed loans can make homeownership more affordable. However, to qualify for the loan, the property must meet the loan's minimum property standards. Rocket Mortgage® doesn’t offer USDA loans at this time.
Drawbacks Of Buying A Foreclosed Home
Buying a foreclosed home is riskier than buying an owner-occupied home. Below are some drawbacks of buying a foreclosed property.
- Increased maintenance concerns: Foreclosed homes may have been neglected by their previous owners. If that’s the case, you’ll be responsible for fixing any problems after purchasing the foreclosed home.
- As is sales: The lender’s main concern is recouping their money as quickly as possible, which, in almost every instance, means an as is sale. You shouldn’t buy a foreclosed home if you don’t have a lot of cash to invest in repairs.
- Squatter’s rights: While a home may be legally foreclosed, it doesn’t mean it’s empty. Many foreclosed homes sit unoccupied for months or years, which can attract squatters. If a squatter lives in the home, you can legally evict them. An eviction can take months and cost thousands of dollars in attorney fees.
Buying A Foreclosed Home FAQs
Let’s explore some common questions about buying a foreclosed home.
Should I buy a foreclosed home?
Buying a foreclosed home has risks such as property disrepair, damage and neglect. The advantage of buying a foreclosed home is that you’re buying a home at a discount, which saves you money.
Consider your financial situation and ability to make repairs before deciding whether a foreclosure is right for you. Calculate the risks associated with your investment because the property may need more work than you initially envisioned. Weigh the pros and cons carefully before deciding whether a foreclosed home is a sound investment for you.
Are foreclosed homes a good investment?
Your real estate investment goals can help determine whether buying a foreclosed home is a good investment option.
The Bottom Line: Buying A Foreclosed Home Has Its Pros And Cons
Buying a foreclosure can be a unique opportunity for home buyers who want to pay lower prices or below market value or are eager to customize and fully restore a home.
If you’re ready to begin the mortgage approval process, start your application online today!
1Participation in the Verified Approval program is based on an underwriter’s comprehensive analysis of your credit, income, employment status, debt, property, insurance, appraisal and a satisfactory title report/search. If new information materially changes the underwriting decision resulting in a denial of your credit request, if the loan fails to close for a reason outside of Rocket Mortgage®’s control, or if you no longer want to proceed with the loan, your participation in the program will be discontinued. If your eligibility in the program does not change and your mortgage loan does not close, you will receive $1,000. This offer does not apply to new purchase loans submitted to Rocket Mortgage through a mortgage broker. Additional conditions or exclusions may apply.
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