How To Buy A Foreclosed Home

Looking to buy a new home but worried you won’t be able to afford the monthly mortgage payment? Do you want to buy in a popular neighborhood but think the homes are too expensive? A foreclosed home may be the solution for your home buying aspirations.

What Is A Foreclosed Home?

A foreclosed home is usually owned by a bank or lender. When a homeowner stops making their monthly mortgage payments, a lender can initiate the foreclosure process and take over ownership of the residence.

Banks and mortgage lenders usually try to sell these homes as quickly as possible, often at lower prices or with smaller down payments.

That’s the main benefit of buying a foreclosed home: You may nab a property that would’ve otherwise been out of your price range.

What Are The Pros And Cons Of Buying A Foreclosed Home?

Buying a foreclosed home isn’t so different from the typical home buying experience. And purchasing the right foreclosed property may get you a home for a bargain.

However, you should first weigh the pros and cons of this type of real estate transaction.

Pros

Buying a foreclosed home may come with these benefits:

Cons

Unfortunately, this type of property may come with these drawbacks as well:

What Are The Most Common Ways To Buy Foreclosed Homes?

Buyers can use several approaches to buy a foreclosure. The best method will depend on each buyer’s needs.

Here are common ways to purchase a foreclosure:

Buying A Foreclosure Property At An Auction

Traditionally, many buyers purchase foreclosed homes at real estate auctions. At an auction, third-party trustees oversee the sale of homes that banks or lenders have taken ownership of due to the original homeowners defaulting on their mortgage loans.

Buyers can purchase a home quickly – and usually for a low price – at auction. But there are logistics to keep in mind. One is that auctions typically require buyers to have cash on hand.

And there are risks to weigh:

Buying A Government-Owned Property

Typically, the safest option is to buy a government-owned foreclosure property. Government agencies, like the U.S. Department of Housing and Urban Development (HUD) or the Department of Veterans Affairs (VA), acquire homes after owners default on the mortgage loans they insure.

Government-owned foreclosures are mostly sold “as-is,” and you may have to place a bid on a property sight unseen. Any repairs typically become your responsibility, though in some cases, the government may repair structural defects before a sale, or you can request repairs.

Buying An REO Owned Home From The Bank

You may see the acronym “REO” while browsing through home listings. It stands for real estate owned. It’s a foreclosed property owned by a bank or lender. Once a property is REO, the bank typically clears any liens on the property and ensures the previous homeowner has moved out.

At this stage, the bank has acquired the home at an auction and is now selling the REO home to recoup the money owed on the mortgage. The bank will likely hire a local real estate agent to list and sell the property.

Buying A Short Sale Home Directly From The Owner

A homeowner may realize during pre-foreclosure that they can’t afford to keep their home but want to avoid foreclosure, so they consider a short sale. Short sales aren’t technically considered foreclosure sales.

With a short sale, owners get permission from their lender to sell their homes for less than they owe on their mortgage. The lender accepts the shortfall to get the home sold and minimize their losses.

Owners sell their homes at low enough prices to ensure a quick sale. But even if the seller agrees to your offer, their bank or lender gets the last word. They can approve your offer or reject it because it’s too low.

How To Buy A Foreclosure Home: Step-By-Step

You may be intimidated by the thought of buying a foreclosed home. But purchasing a foreclosure home isn’t too different from the traditional method of buying a home. However, a foreclosure requires additional research, and you’ll need to be comfortable taking on a bit more risk.

Let’s review the steps you’ll need to take to buy a foreclosed house with confidence.

1. Determine How Much Home You Can Afford

Budgeting matters when buying a home – including a foreclosed home. While you may nab your new home for a lower price tag, you should also consider how much you can realistically afford. Before buying a foreclosed home, ask yourself if you can afford:

First-time home buyers should be cautious when considering a foreclosed house. They might be tempted to buy a foreclosure with a price tag at the top of their home buying budget. But expected (and unexpected) repair costs could turn their dream home into a bottomless money pit.

Are you trying to determine how much home you can afford? Try out our home affordability calculator to get the numbers you need to make the right buying decision.

2. Hire An Experienced Real Estate Agent

If you decide to purchase a foreclosure, consider working with an experienced real estate agent who has access to a local multiple listing service (MLS) and knows the local market.

An experienced real estate agent can discuss challenges you may run into with a foreclosed property. Bear in mind that every state has laws and regulations concerning foreclosures. Work with an expert who knows and understands these laws.

3. Get Preapproved For A Mortgage

No matter what type of home you buy, getting preapproved for a mortgage is a smart move. You can get preapproved at no charge. It involves a lender running your credit to verify your income and debt to determine how much money you qualify for to buy a home.

Once you get a preapproval letter from a lender, you’ll know exactly how much you can spend on a home.

Having a preapproval letter can also make you an attractive buyer. Foreclosure sellers, such as banks or government agencies, prefer working with buyers they know can qualify for a mortgage.

4. Use The Right Mortgage Lender

A bank or lender may want you to get preapproved through them to purchase a bank-owned property because they want to confirm your eligibility or to identify serious buyers. However, you aren’t obligated to work with the bank or lender.

If you already have a preapproval letter with terms you like, you can use that or ask the lender to match the preapproval offer.

5. Do Your Due Diligence

It may be worthwhile to assess a house’s condition before you make an offer. You can’t have an inspection performed until your offer is accepted. But in the meantime, you can learn how long the home has been unoccupied and ask the seller whether the previous homeowner performed routine home maintenance.

You should also check with your local building department to see if any open building permits may develop into an issue after you close.

6. Make A Competitive Purchase Offer

If your initial research doesn’t reveal any glaring red flags, you can start to draft an offer on the home. Who gets the offer will depend on the stage of the foreclosure process.

You might be tempted to make a low offer on a foreclosed home because foreclosed properties often sell for less than traditional homes. But if you make an offer that’s too low, the seller may reject it.

Work with your real estate agent to make a competitive offer. Your agent will advise you on what this figure should be.

7. Get A Home Inspection

Keep in mind that you’re typically going to buy a foreclosed home as-is. Whether you’re buying from a bank, lender or government agency, they usually won’t pay for any needed repairs.

Because of that, you should include a home inspection when the opportunity presents itself to uncover any defects in a home. If a property has too many or expensive problems to fix, you may need to pass on buying it.

Banks and government agencies usually let buyers include a home inspection contingency in their offer, allowing you to order a home inspection after your offer is accepted but before the sale closes. Your home inspector will tour the residence, looking for everything from leaks in the roof to evidence of a shifting foundation.

Not having a clue about a home’s condition makes buying one through the auction process potentially risky. Yes, the prices might be lower. But without a home inspection, you won’t know what problems are lurking in the home until you get the keys in your hand.

How To Buy Foreclosure Homes: FAQs

Learn more about buying a foreclosure property with the answers to these frequently asked questions.

The Bottom Line

If a tight budget has been creating roadblocks to homeownership, a foreclosed home may be the right choice if you can find one below market value. But don’t rush into this decision.

It’s best to work with a real estate agent who can explain the pros and cons of buying a foreclosed home. Before making an offer, be aware of the additional risk you may be taking with extensive home repairs or unexpected defects on a property’s title.