Buying a foreclosed home can seem like a tempting deal due to their relatively low prices. However, foreclosed homes can come with costly, challenging repairs that may only be found after purchasing. If you’re in the market for property and are considering a foreclosed home, here are some things to keep in mind before making an offer.

What Is a Foreclosed Home?

Many prospective homebuyers may not know they can buy a foreclosed home, as the process is different from typical sales.

A home is foreclosed when a homeowner cannot make their mortgage payments, and the home transfers to the mortgage lender, typically a bank. When this occurs, banks often try to recover the loan as quickly as possible, so the home will be set to auction. Homebuyers can buy foreclosed homes at different stages in this process.

Understanding the Foreclosure Process

Foreclosures can often take time. It starts when a homeowner misses payments on their mortgage and the lender sends a formal notice of default. These often explain how the homeowner has failed to meet their contract terms and specify a date in which the lender will take further action, such as foreclosure. Most homeowners would have to fail to pay for 120 days for a lender to begin legal foreclosure, but regulations vary by state.

• Pre-foreclosure: Pre-foreclosure begins when a homeowner has fallen behind on their payments, but the lender has not begun legal foreclosure. The homeowner may sell the property as a short sale, which is selling for less than the remaining mortgage value to minimize the impact on the homeowner’s credit score and reduce the lender’s loss.
• Auction: Once a lender owns a home, it normally goes for sale as a foreclosure auction, often starting at a price lower than market rates. Homes sold at auction are typically sold as-is and sight-unseen., They are usually bought with cash, so experienced homebuyers such as investors and real estate flippers are the most common buyers.
• Real Estate Owned (REO): When homes fail to sell at auction, the properties become REOs, or bank-owned properties. Banks list these with the help of a real estate agent, and the properties are sold through the typical homebuying process, allowing potential buyers to take out mortgages and get standard home inspections.

If buying a foreclosed home seems like the right move for you, follow these steps to find your new home.

How to Buy a Foreclosed Home in Five Steps

Since buying a foreclosed home is less common, you might be wondering how it works.

1. Get preapproved: Preapprovals are an important step in homebuying, whether the home is foreclosed or not. Mortgage preapprovals are official statements from banks explaining how much they are willing to lend to you, as well as potential interest rates on that loan.
2. Find a real estate agent with REO experience: Having a real estate professional by your side during the buying process helps you find the best home for your preferences. Pick a real estate agent with experience with REOs, as these homes may require closer inspections and more legal assistance than standard sales.
3. Search for properties: Foreclosure listings can be found on many of the same sites as regular listings. Outside of real estate sites, there are certain platforms that specialize in listing foreclosures, as well as government sites that may mention local foreclosures.
4. Make a competitive offer: If you’re ready to make an offer on a house, try to make a competitive offer. Many foreclosed homes are listed below market rate, so that may give you additional budget to put in an offer above expectations. Be aware that foreclosed homes often take longer to sell due to liens, bank approvals, repairs, evictions, or other additional challenges.
5. Get a home inspection: If you’re buying a REO or have the rare opportunity for a home inspection at auction, it’s in your best interest to get one. Because a foreclosed home may be behind on repairs, inspections can help you estimate repair costs or avoid buying homes with serious damage.

Financing a Foreclosed Home

Financing foreclosed homes can be slightly more difficult than other properties. Due to possible damage or missed maintenance, it’s harder for the condition of the home to be assessed in a home appraisal. Most banks will not agree to a loan without knowing the property’s fair market value to assess if it’s worth the loan amount.

You may also find tougher competition on foreclosed homes, with more buyers willing to pay in cash due to reduced prices or auction conditions.

If you’re able to finance a loan, there are a few different types of mortgages that may be applicable. Many factors can influence what mortgage type is right for you, so be sure to take them into careful consideration before taking out a loan.

Before buying a foreclosed home, consider the pros and cons of such an investment.

Pros and Cons of Buying a Foreclosure

Homebuying is a big decision, especially with the added risks of a foreclosed property. Consider these pros and cons of buying a foreclosed home.

Buying Foreclosed Homes FAQs

If you’re preparing to buy a foreclosed home, you might still have some of the following questions.

Can I Buy a Foreclosed Home with No Money Down Using a VA Loan?

Yes, you can buy a foreclosed home with no money down through a VA loan. However, the Department of Veterans Affairs sets strict standards for minimum property requirements. If the foreclosed home does not meet property standards, then the loan cannot be used on that home.

Are Foreclosed Homes Always Cheaper Than Market Value?

Typically, foreclosed homes are cheaper than market value, but there are no guarantees on how much it may be priced for. While the affordable costs can be a great opportunity, keep in mind these homes are sold as-is and may have additional repairs after purchasing.

Can I Get a Home Inspection on a Foreclosed Property?

If the home is being sold at auction, it may not be possible to get a home inspection. If it’s listed on the open market, you can hire a home inspector to evaluate its condition. Regardless of what the home inspector finds, foreclosed homes are typically sold as-is and you will have to pay for repairs.

Can I Negotiate the Price of a Foreclosed Home?

You can negotiate on the price of a foreclosed home just as you would for a standard home sale. However, it can be difficult, and negotiations may make the process take significantly longer.

How Long Does It Take to Close on a Bank-Owned Home?

Buying a foreclosed property can sometimes be as efficient as buying a regular home, but it often takes months longer depending on the bank and paperwork involved.

Final Thoughts: Buying a Foreclosed Home

Foreclosed homes can be a great route for homeowners that are looking for lower upfront costs and are willing to invest in repairs. Depending on your situation, buying a foreclosed home may be the ideal step in your homebuying journey. If you’re ready to begin, get prequalified today with Freedom Mortgage and speak with an experienced Loan Advisor.