Buying A Foreclosed Home: Pros, Cons And A Step-By-Step Guide To The Process
Miranda Crace8-minute read
December 03, 2020
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 Does Foreclosure Mean?
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. Foreclosures are typically the result of a financial disaster for the current homeowner that left them unable to keep up with their mortgage.
Buying a foreclosed home is a little different than buying a standard property owned by a homeowner.
How Does Foreclosure Work? A Look At The Process
Foreclosure is the process in which a lender takes possession of a home. It has several stages, which are important for a buyer to understand when considering a foreclosure.
- Payment default and notice of default. Payment default occurs after the homeowner has missed at least one payment. A notice of default is usually sent by the bank after 90 days of missed payments. Foreclosure referral timelines will vary based on the contract agreement as well as the policies of the lender and investor in the mortgage. A homeowner is often given time to work out a new payment plan with the bank.
- 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 in general an online search will 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, 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: Determine The Type Of Foreclosure Purchase You Are Most Interested In
There are three main ways to purchase a foreclosure: through a short sale, at an auction or from a bank 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. 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 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.
If the auction does allow for financing through a mortgage, you want to make sure that you have a preapproval ready. It’s important to realize that not all approvals are the same. We recommend a Verified Approval1 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. It is generally not recommended.
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.
Step 2: Hire 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 search for foreclosures, 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: Find Foreclosures
Although your realtor 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: 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 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 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.
A Verified Approval can give you a leg up because income and assets have already been checked out and the lender will know that your financing is less likely to fall through.
Step 5: 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 these types of foreclosed properties if you’re advanced at home repair.
Step 6: 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.
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 (or get some or all of their money back) 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 as long as it’s not a cash-only auction. You can get a conventional loan, VA loan, FHA loan or USDA loan to buy it as long as the home you’re considering is in livable condition. At this time, Rocket Mortgage® isn’t offering USDA loans. These government-backed loans can make homeownership more affordable.
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. In some rare cases, banks may agree to do some repairs for you; however, you shouldn’t buy a foreclosed home if you don’t have a significant amount of cash to invest in repairs.
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 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.
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.
If you’re ready to get a mortgage approval, get started online!
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 Quicken Loans’ 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 Quicken Loans through a mortgage broker. Additional conditions or exclusions may apply.
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