Is buying a foreclosure home a good idea? Buying a foreclosed home can be the best option if you are on a low budget and you can’t afford to buy a new home in your ideal neighborhood. Unlike before, today is much easier to find foreclosed homes for sale thanks to the many online sites that specialize in foreclosure listings.
The main advantage of buying a foreclosed home is the fact that you purchase it at a lower price below the market value. However, the buying process can take a longer period compared to buying a traditional listing.
What’s a foreclosure?
A foreclosure is where a home is taken by the lender when the homeowner falls behind their monthly payments or when they have completely defaulted the mortgage payments. The lender repossesses the home and puts it up for sale at a foreclosure auction.
This is done by the lender in an effort to recover as much capital investment by selling the foreclosed home at a slightly lower price than comparable properties market value.
Different stages of foreclosure
When buying a foreclosed home, it’s important to understand where it stands in the foreclosure process/stages. In the earlier stages of foreclosure, a home can still be owned by the original homeowner.
This happens in the pre-foreclosure and short sale phases. If a home is not successfully sold, the ownership rights shift to the lending entity such as a bank or government institution.
Pre-foreclosure is where the mortgage lender notifies the homeowner about the default in mortgage repayments and the intended foreclosure proceedings. The lender allows the homeowner to sell the home in an auction.
If they can manage to sell the home at an auction, they avoid facing actual foreclosure proceedings. Pre-foreclosures can be listed online or in county/city courthouse buildings.
- Short sale
A short sale is whereby the lender agrees to accept less from the sale of a property than what is owed on a mortgage. Apart from defaulting, it also happens when homeowners are faced with a financial crisis like job loss and they can no longer manage to honor their monthly mortgage payments.
The property under short sale is known as underwater since its value is less compared to the outstanding loan. Short sale homes are often labeled as “pending bank approval” because the lender must first agree to sell the home “short” of what is owed.
- Sheriff’s sale auction
After the elapse of the foreclosure notice, if the homeowner has not cleared the defaulted mortgage payments, a sheriff’s sale auction is carried out to allow the lender to recoup their investment.
The auction is undertaken by local authorities in strict adherence to the law at local court buildings. The property is then publicly sold to the highest bidder. All Sheriff’s sale auctions are published in the local newspapers or online.
- Entity-owned properties
If foreclosed homes do not sell at the auction, they are repossessed to become lender’s real estate-owned properties. There is an entity department that deals with matters real estate where they are managed. Various online sources promote bank-owned real estate foreclosed listings.
If the foreclosed home was purchased using a loan that was guaranteed by a federal government-owned institution such as FHA, USDA, or VA loans, the properties are repossessed by the government. They are later sold by approved real estate brokers who work in collaboration with federal agencies.
How to Buy a Foreclosed Home
- Find a real estate agent who specializes in foreclosures
All real estate agents are not the same. Look for realtors who are experienced and those who specialize in foreclosures. The best way to do so is to find a database of foreclosed homes in your preferred neighborhood and get the details of the realtors who managed the transactions.
Once you settle on one, you can have a meeting where you will explain your desired home checklist as well as the commission. Banks and state-owned agencies post their foreclosed homes inventory online and you can reach out to them.
- Get pre-approved by your lender
If you can’t manage to buy cash, then you be ready to get a mortgage pre-approval letter before making an offer on foreclosure. The lender will review your income and credit score and determine how much loan you can qualify for.
Engaging a mortgage lender can help you make the right choice when it comes to selecting the right financing option. There are various government-backed financing options available such as; 203 (k) loans, FHA, Fannie Mae’s HomePath program, and Freddie Mac’s HomeSteps program that you can apply if you qualify.
- Find foreclosure listings
Research the market to find the available foreclosure listings in your preferred areas. Let your agent conduct a comparable market analysis. Doing so will help you have a better understanding of the recent prices of similar properties before you can make your offer. You will also understand the level of foreclosure competition in your targeted market.
- Making your bid offer
Engage your realtor to craft a winning offer. Attach the pre-approval letter if you are planning to finance the purchase through a mortgage. If the competition is high from multiple bidders, consider keeping all your contingencies at a minimum. To increase your chances of winning the bid, you can give a better offer price since most of the foreclosures are sold at a discounted price value.
Cons of buying a foreclosed home
- You buy the home in “as-is” condition
- Some foreclosed homes require extensive repairs
- The foreclosure process is long and time-consuming compared to buying traditional listings
- There is stiff competition from experienced real estate investors who are always ready to give a cash offer to foreclosures
Buying foreclosed homes can save you hundreds of dollars when you plan well. Make your homeownership dream come true by checking out the local MLS and online sites that upload foreclosure homes for sale listings near you.