Nowadays, you might want to know how to buy a foreclosed home. If you’re lucky, you may acquire a great home at a highly affordable price. Although, buying a foreclosure involves several risks as well.
Let’s begin with the recent government interventions that affect foreclosures. Then, we’ll discuss why purchasing a foreclosed property can be a bad or good idea. More importantly, we’ll explain how you can start buying your first foreclosed house.
Nowadays, people struggle to make their first home purchase. In response, some turn to foreclosed homes to find affordable properties. If you’re planning to do the same, make sure you’re familiar with the potential risks too.
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Pause on foreclosures will end soon.
Many people lost their livelihoods due to the coronavirus lockdowns. They were meant to protect public health. But, unfortunately, it came at the expense of the economy.
As a result, numerous homeowners risked losing their homes. In addition, if they fail to pay their mortgages, their lenders may repossess their property. In other words, they risk foreclosure.
Thankfully, President Joe Biden extended the foreclosure moratorium. This bought them time to remain in their houses. But, more importantly, it allows them to stay indoors to avoid the virus.
Yet, this didn’t stop foreclosure for abandoned and vacant homes. In response, more people may have searched how to buy a foreclosed home online.
What’s more, that pause on foreclosures will end on June 30. The White House hasn’t announced another extension at the time of writing.
That’s why we may see more foreclosed properties in the coming months. If you’re looking for an affordable home, you may find it among the foreclosures.
Types of foreclosures
Before we talk about how to buy a foreclosed home, we need to discuss the types. A foreclosed property goes through stages. You may purchase them at each level of the process:
- Pre-foreclosure – At this stage, the homeowner still owns the property. However, they’re in default of their mortgage payments. Selling a pre-foreclosure home allows the seller to bail out before the bank takes the house.
- Short sales – The value of these foreclosure properties is lower than their mortgage balance. The homeowner doesn’t have to be in default, but they usually have financial difficulties. Buying a short-sale property is similar to a regular home purchase.
- Sheriff’s sale auctions – This happens when the lender has notified the previous owner of default. They weren’t able to catch up on mortgage payments, so they let others bid for it. A sheriff’s sale allows the lender to get repaid quickly.
- Real estate-owned (REO) properties – Otherwise known as bank-owned properties, they’re the ones that don’t sell at auction. Instead, they’re listed on websites like RealtyTrac.
- Government-owned properties – These are similar to REOs, but the government handles them. You may purchase these with home loans from the FHA or the VA. Visit the HUD website for details on how to buy a foreclosed home from the government.
Benefits of buying a foreclosed home
- You could get a great deal – Lenders want to get rid of foreclosed properties to cut their losses quickly. That’s why they’re more willing to part with them at lower prices. As a result, you may save up to 15%!
- Live somewhere you couldn’t afford before – You may have wanted to live in a certain neighborhood that you couldn’t afford. If you find a foreclosed home there, that may be your chance!
- You compete with fewer buyers – As much as 48% of first-time homebuyers avoid foreclosed homes. That means fewer people are bidding trying to buy your chosen property. Later, we’ll discuss why they avoid foreclosed properties.
- You may score a good investment – A foreclosed home’s true value may exceed its selling price. Once home prices rise, you may flip the home for a huge profit.
Risks of buying a foreclosed home
- You can’t inspect the property – You’re not allowed to check the place before buying. This means you won’t know it has problems until your purchase.
- The house may have severe problems – The previous owner is understandably devastated by their foreclosed home. In response, some of them may ruin the home for the buyer. For example, one owner poured cement into the water pipes!
- You may have to pay a lot for repairs – Once you see these problems, you’re liable for them. This could mean spending an excessive amount on repairs.
- Someone else might be inside – Worse, dangerous people may have occupied the property. Ask someone to accompany you during the first-time home inspection.
- You might take on huge debt – The property may have liens before its foreclosure. Once you buy it, you take on those debt obligations too.
- Foreclosure auctions require cash – If you’re bidding for a foreclosed property, prepare cash. Otherwise, you may encounter cash-flow issues.
- Closing may take months – The bank could take ages to complete the paperwork. If you fail to submit or sign a document, that could mean more delays. Also, you’ll have to deal with the previous owner, who may take forever to move out.
Steps on purchasing a foreclosed home
- Research – Look for properties that will save you money. Check multiple factors like location, closing costs, and interest rates. It’s best to find a home selling for at least 80% of its market value. However, you’ll have to consider other costs too.
- Find experienced real estate agents – Look for a foreclosure specialist in the area where your chosen property is located. They could help you navigate the local regulations and identify good deals. If you’re buying an REO home, though, you may have to work with the bank’s broker.
- Obtain a preapproval letter – You may get them from a mortgage lender. The letter specifies how much cash you can borrow based on their assessment. In addition, they’ll help you gather the required paperwork. Otherwise, you’ll have to pay in cash.
- Submit a competitive offer – Your real estate agent can help you with this. They’ll help you plan the offer that fits your finances and suits the seller.
- Prepare to accept a home as-is – Buying a home in foreclosure means you get whatever problems it may have. As we said, this means you’re responsible for debts and repairs connected to the property.
Foreclosed homes might look appealing to buyers. Their owners see it as a terrifying experience, though. If you’re facing such a situation, you have ways to prevent it.
First, speak with your lender. You may negotiate a way to keep your home. Perhaps they could lower monthly payments while you get extra income.
Second, you may apply for the Making Home Affordable (MHA) program. It could provide free counselors to help you keep your home. Visit their website for more information.
Learn more about how to buy a foreclosed home
Why are foreclosed homes so cheap?
Their previous owners weren’t able to keep up with the mortgage payments. In response, lenders want to sell them quickly by lowering the price to attract more buyers.