*As of July 6, 2020, Quicken Loans is no longer accepting USDA loan applications.
Have you ever considered buying a foreclosed home – a diamond in the rough at a price you can afford? 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 Is Foreclosure?
A foreclosure is a home that’s seized and put up for sale by the bank that gave the original owner a loan. When you see a home listed as “foreclosed,” it means that it’s owned by the bank. Every mortgage contract has a “lien” on your property. A lien allows your bank to take control of your property if you stop making your mortgage payments.
Here are a few of the most common reasons for foreclosures:
- Insurmountable medical or credit card debt that keeps the owner from making payments
- A bankruptcy that requires liquidation
- A job loss or move
- Drastically falling home prices
- Maintenance issues that are too expensive to repair and make the home unlivable
Buying a foreclosed home is a little different than buying a standard property owned by a homeowner. Most foreclosures are sold as-is, which means that you can’t negotiate with the bank to make repairs for you.
Benefits Of Buying A Foreclosed Home
There are a few benefits of buying a foreclosed home:
Lower prices: One undeniable benefit is that they almost always cost less than other homes in the area. This is because they’re priced by the lender, who can only make a profit if the home gets sold.
Fewer title concerns: Buying a home from a homeowner means you may not get a clean title, which is the legal right to own a property. A homeowner might have back taxes due or liens on the home that may force you to cancel the sale. When you buy a foreclosed home, you don’t need to worry about title concerns because the bank clears the title for you.
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. You can get a VA loan, FHA loan or USDA loan to buy it as long as the home you’re considering is in livable condition. These government-backed loans can make homeownership more affordable.
Renovation potential: In most cases, banks aren’t willing to make repairs and renovations before selling a foreclosure. However, there’s no rule that says a bank can’ttake care of repairs for you. If you happen upon a home that’s been on the market for a long time, you might be able to convince the bank to make repairs before you move in.
Drawbacks Of Buying A Foreclosed Home
Buying a foreclosed home is riskier than buying a home that’s owner-occupied. Some of the drawbacks to buying a foreclosed property include:
Increased maintenance concerns: 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. Homeowners may even destroy the property intentionally. You’re responsible for fixing whatever problems the home may have when you buy a foreclosed home.
As-is sales: The bank’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.
Auctions: A bank might decide that the best course of action is to sell a home at a sheriff’s auction. In that case, you may need to pay the full final bidding price before you can take control of the deed. You typically cannot get a mortgage loan for a home that you buy at an auction because underwriting and appraisals take too much time.
Periods of redemption: Just because a home is labeled as “in foreclosure” on a real estate listing site doesn’t mean that home will ever go up for sale. Almost every state affords a period of redemption to homeowners in which they can earn their home back by catching up on their bills. In some states, homeowners may have up to 12 months to take back control of their property.
Squatter’s right: A home might be legally foreclosed, but it doesn’t mean that there’s no one 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.
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: Determine Who You’ll Purchase The Property Through.
There are three ways to buy a home in foreclosure: from the homeowner, from the bank or at an auction.
Purchase From A Homeowner
You don’t technically buy a home from a homeowner whose property is in foreclosure. What will usually happen in that case is that a short salewill happen. A short sale occurs when the homeowner sells a home for less than what they owe on the mortgage. When you buy a home in foreclosure, the bank (not the homeowner) needs to approve your offer. You might spend a lot of time waiting for approval.
Purchase From A Bank
You skip working with the homeowner altogether when you purchase a property through the bank. The bank usually clears the title and evicts the current homeowner before you buy a foreclosed property. Most banks 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.
Purchase At Auction
You’ll get a home faster at auction than you would if you negotiated with the bank or a seller. However, most auctions only accept cash payments, which means that you’ll need to have a significant amount of money ready for the purchase. 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.
It’s an excellent idea to determine the foreclosure status of the home you want to buy or get in contact with a real estate agent who specializes in foreclosure sales.
Step 2: Work With A Real Estate Agent To Facilitate The Purchase.
Most banks hand foreclosed properties off to a real estate owned (REO) agent who works with standard real estate agents to find a buyer.
Not every real estate agent has experience working with REO agents. An experienced foreclosure agent can help you navigate your state’s REO buying process, negotiate your price, order an inspection and make an offer. Research real estate agents in your area and look for an agent who specializes in foreclosure sales.
Step 3: Get Approved For A Mortgage To Finance Your Purchase.
Unless you buy a home at a foreclosure auction, you’ll probably obtain 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 preapproval lets you know how much you can get in a home loan. Choose a lender and apply for a mortgage preapproval to narrow your search.
Step 4: Conduct An Appraisal And Inspection On The Property.
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.
An inspection is a more in-depth look at a home. 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 an inspection or appraisal before you buy. You should only consider buying foreclosed properties if you’re advanced at home repair.
Step 5: Purchase Your New Home
Read your inspection and appraisal results and 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.
A foreclosure is a home that’s under the control of a bank. People foreclose on their homes when they can no longer make their payments. In most cases, foreclosed homes are much cheaper than other homes in the area, and you can sometimes find a good deal. However, these homes also often 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 a foreclosure. Your real estate agent will help guide you through the foreclosure process because most banks don’t sell to individual buyers. Get an appraisal and inspection once you find a home you’re interested in. You’ll also need to secure funding with a mortgage preapproval. Follow up with your lender and agent to finalize the sale once the results of your inspection look acceptable.
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