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Buying A Foreclosed Home: Pros, Cons And A Step-By-Step Guide

Miranda Crace8-minute read

January 10, 2023


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Have you ever considered buying a foreclosed home? As you might imagine, it’s important 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. We’ll also dive into the benefits, drawbacks and steps to buying a foreclosure.

What Does Foreclosure Mean?

A foreclosure takes place when a home is seized by the lender. When you see a home listed as foreclosed, it means that it’s owned by the lender.

Every mortgage contract has a lien on your property. A lien allows your lender to take control of your house if you stop making your mortgage payments. Foreclosures are typically the result of the homeowner being unable 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 Does Foreclosure Work?

Foreclosure has several stages, which are important for a potential buyer to understand when considering buying a foreclosed home.

  • Payment default and notice of default: Payment default occurs after the homeowner has missed at least one payment, and after several months of missed payments, a homeowner’s entire mortgage can default. This typically initiates the preforeclosure stage of the foreclosure process. A notice of default is usually sent by the lender after 90 days of missed payments. Lenders may make contact prior to this to understand your situation and see if they can offer assistance. Rocket Mortgage® clients struggling to make the payments should fill out our Application For Success.
  • Notice of trustee’s sale: The lender must record the impending sale with the county and publish news of it in the local paper. This is one way of finding a foreclosure to buy, although an online search will generally be more effective.
  • Trustee’s sale: The lender attempts to sell the property at public auction.
  • Real estate-owned: If the property does not sell at auction, the bank will become the owner. They will then attempt to sell the property. For most people looking to buy a foreclosed home, especially those purchasing with a VA loan, this is the stage of foreclosure in which they will buy.

How To Buy A Foreclosed Home

Think that buying a foreclosure is right for you? Here are the steps you can take to buy a home in foreclosure:

Step 1: Understand The Options For Buying A Foreclosed Home

There are two main ways to purchase a foreclosure: at an auction or from a lender after they have failed to sell at auction.

Purchase Through Short Sale

A short sale occurs when the homeowner sells a home for less than what they owe on the mortgage because the value has declined. Foreclosure has not been completed.  The homeowner still owns the home so you work through their REALTOR® or other real estate agent.

When you buy a home in a short sale, the lender (not the homeowner) needs to approve your offer. You might spend a lot of time waiting for approval.

Purchase At Auction

You’ll get a home faster at auction than you would if you negotiated with the bank or a seller. Homebuyers also have the opportunity to buy a property significantly below market value at auction. However, most auctions only accept cash payments, which means that you’ll need to have a significant amount of money ready for the purchase.

If the auction does allow for financing through a mortgage, you want to make sure that you have an initial approval ready. It’s important to realize that not all approvals are the same. We recommend a Verified Approval where your income and assets are verified.

By purchasing at an auction, you also agree to buy the home as is without an appraisal or inspection. This means you take a big risk when you buy a foreclosed home at an auction. Speak with a real estate attorney if this is something you’re interested in.

Purchase From A Lender

You skip working with the homeowner altogether when you purchase a property from a Lender’s real estate-owned (REO) inventory. The lender usually clears the title and evicts the current homeowner before you buy a foreclosed property.

Most lenders won’t sell a home directly to an individual; you’ll need to talk to an experienced real estate agent to view available properties. These homes are usually sold as is. However, you’ll usually get the opportunity to view the home and order an inspection before you close.

Step 2: Hire A Real Estate Agent

Most lenders hand foreclosed properties off to an REO agent who works with standard 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 price, order an inspection and make an offer.

Step 3: Find Foreclosures For Sale

Although your real estate agent will likely be able to help you search for foreclosures, you may want to investigate for yourself as well. The internet has made it much easier than it used to be to find foreclosures in your area and in other parts of the U.S. There are now multiple different areas of the web where you can search. Here are three we especially recommend:

  • Rocket HomesSM 1: This online repository for real estate listings will even tell you what type of foreclosure you are dealing with.
  • HUD: This official government website lists foreclosed homes. There will be a real estate agent listed whom your own agent can contact.
  • Fannie Mae HomePath®: Here you will be able to search for foreclosure listings (called HomePath® properties) by address, ZIP code or MLS number.
  • Freddie Mac HomeSteps®: This is Freddie Mac’s answer to the Fannie Mae foreclosure site, with very 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 home purchase. Once you’ve found an agent and you get started looking at homes, you’ll want to get preapproved for a loan. A mortgage preapproval is an initial approval that lets you know how much you can get in a home loan. Choose a lender and apply to narrow your search.

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Step 5: Get An Appraisal And Inspection

Inspections and appraisals are both crucial when it comes to buying a foreclosure. An appraisal is a lender requirement that lets you know how much money a property is worth. Lenders require appraisals before they offer home loans because they need to know that they aren’t lending you too much money. They also protect you in that you know you’re not overpaying.

A home inspection is a more in-depth look at a property. An expert will walk through the home and write down everything that needs to be replaced or repaired. Because foreclosures usually have more damage than homes for sale by owner, 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. You should only consider buying these types of foreclosed properties if you’re advanced at home repair.

Step 6: Purchase Your New Home

Read your inspection and appraisal results then decide if the home in question is really right for you and whether you’re okay with buying a home as is. Contact your mortgage lender to finalize your loan if you have the money or skills to make any needed 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 in the area or they are listed below market value. This is because they’re priced by the lender, who wants the home off of their books.
  • Standard loan configurations: You might have to follow a slightly different bidding and buying process when you buy a foreclosure, but you still have a few loan options as long as it’s not a cash-only auction. As long as the home you’re considering is in livable condition, you can get a conventional loan or a government-backed VA loan, FHA loan or USDA loan to buy it. Government-backed loans can make homeownership more affordable, but if the property is damaged, the government may require work to be done. We don’t offer USDA loans at this time.

Drawbacks Of Buying A Foreclosed Home

Buying a foreclosed home is riskier than buying a home that’s owner-occupied. Below are some of the drawbacks to buying a foreclosed property.

  • Increased maintenance concerns: Some homeowners have no incentive to maintain the home’s condition when they know they’re going to lose their property to foreclosure. If something breaks, the homeowner won’t spend money to fix it, and the problem could get worse over time. You’re responsible for fixing whatever problems the home may have when you buy a foreclosed home.
  • As-is sales: The lender’s main concern is recouping their money as quickly as possible, which means an as is sale in almost every instance. You shouldn’t buy a foreclosed home if you don’t have a significant amount of cash to invest in repairs.
  • Squatter’s rights: A home might be legally foreclosed, but it doesn’t mean that no one is living on the property. Many foreclosed homes sit unoccupied for months or years at a time, which could attract squatters. If you buy a property with a squatter living in it, you need to legally evict them even if the person or people in question have no claim to the home. This can take months and cost thousands of dollars in attorney fees.

The Bottom Line: Buying A Foreclosed Home Has Its Pros And Cons

Buying a foreclosure can be a unique opportunity for home buyers looking to pay lower prices or below market value or for complete home restoration projects. Keep in mind that many foreclosed homes could have severe damage and structural issues and are usually sold as is.

Get in contact with an experienced real estate agent if you want to take a risk on buying a foreclosed home. Your real estate agent will help guide you through the foreclosure process, because most lenders don’t sell to individual buyers.

Once you find a home you’re interested in, get an appraisal and property inspection completed. You’ll also need to get initial mortgage approval to secure funding. Follow up with your lender and agent to finalize the sale once the results of your inspection look acceptable.

If you’re ready to begin the mortgage approval process, get started online! You can also speak to one of our Home Loan Experts at (833) 326-6018.

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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Miranda Crace

The Rocket Mortgage Learning Center is dedicated to bringing you articles on home buying, loan types, mortgage basics and refinancing. We also offer calculators to determine home affordability, home equity, monthly mortgage payments and the benefit of refinancing. No matter where you are in the home buying and financing process, Rocket Mortgage has the articles and resources you can rely on.