Buying real estate can be both exciting and intimidating, but it doesn’t have to be. If you’re considering buying a foreclosed home, you have probably already realized that these properties are an excellent deal due to their low prices. However, foreclosed homes are different from regular ones, so you need to familiarize yourself with the process before making an offer on one. Here’s a step-by-step guide to buying a foreclosed home for sale so that you know exactly what to do the next time you see one at an attractive price!
Step 1 – Know Your Budget When You’re Looking For Foreclosed Homes For Sale
When buying a home in foreclosure, you might be able to get a deal. Yes, the price tag may be cheaper. However, foreclosed homes aren’t free. And despite what you might have heard, you can’t buy a foreclosed property for a price that’s unrealistic, say $10.
You will need to develop a household budget listing your income and expenses (including estimates for discretionary expenses such as eating out and entertainment) in order to determine how much mortgage payment you can afford.
It’s critical that you can pay for the home you’re looking at. Otherwise, you might purchase a foreclosure. Making monthly mortgage payments will be challenging if you buy a home you can’t afford.
With any home purchase, it’s essential to calculate your debt-to-income (DTI) ratio. As its name suggests, this ratio determines what percentage of your gross monthly income your monthly expenses (including your estimated new mortgage payment) will consume.
If your debt-to-income ratio is higher than that, you’ll struggle to qualify for a home loan. Most lenders want your monthly debt payments to be no more than 43 percent of your gross monthly income.
You should be careful when buying a foreclosed home. You might be tempted to buy a foreclosure whose price is way above your budget.
A foreclosed home might require expensive repairs. If you’ve purchased a home at the top of your budget, you might not be able to afford them.
Step 2 – Start Looking For Lenders Who May Approve You
In order to secure a foreclosure at an auction or REO listings, you will need to find a mortgage company to support you. Buying with cash is the most reliable option, but few homebuyers can do that. If you want to avoid obstacles on the way to owning a foreclosed property, secure a prequalification and preapproval for a loan. Once the purchase of the property is agreed upon, you’ll need to provide evidence of funds to get the deal through. If you are not fully prepared, they will not stay and wait for you to gather financing.
If you get a preapproval, you will know what your mortgage rates and terms are before you put in an offer. You do not have to get a mortgage through the bank selling the property. Foreclosure and the new loan are treated as separate transactions by the lender, and they are separate. Thus, it isn’t easier or even less costly to use the same bank, unless the rates and terms are satisfactory for you. A perfect mortgage lender isn’t hard to find.
Before going to make a cash offer on a house, be sure to line up the cash funds, because when the owner accepts your offer, you’ll need to go forward with the purchase in a very short amount of time.
Step 3 – Decide On Your Offer Strategy For Buying Foreclosed Homes For Sale
There are several methods for buying a foreclosure, and it is important to know the steps to take advantage of the best method.
Keep these buying methods in mind.
Buying From The Owner
Short sales occur when the homeowner owns a property and knows that foreclosure is possible. The owner tries to sell their home before it’s lost through foreclosure. Therefore, short sales do not qualify as foreclosures.
In a short sale, owners agree to sell their homes for less than the amount of their mortgage payments. Owners who owe $500,000 on their mortgage may still try to sell their home for $450,000 even if such a sale leaves them $50,000 short of repaying their debt.
In some short sales, the owner’s bank agrees to the sacrifice to sell the home and free up their mortgage.
These homeowners hope to get a quick sale by listing their house at a price that’s affordable for everyone. However, for buyers, this can be tricky. If your offer is accepted by the sellers, the bank or lender might reject it if it’s too low.
Purchasing Foreclosed Homes For Sale At An Auction
Real estate auctions are the traditional way to buy a foreclosed house. At auctions, third-party trustees sell homes that banks or lenders have taken over after the original owners defaulted on their mortgage.
On the one hand, homes are bought quickly and for low prices at auctions. On the other hand, though, there are still pitfalls to contend with. For example, an auction typically only accepts cash as a payment method.
There are also dangers:
- A home bought at auction might have a lien due to nonpayment of property taxes.
- Homes bought at auction may come with expensive repairs.
- During an appraisal, a real estate appraiser determines what a home is worth in the current housing market. You risk paying too much for a home at an auction, even if you purchase it through an auction without an appraisal.
Purchasing A Government-Owned Property
Additionally, it might be worth buying foreclosures owned by the government rather than banks and other lenders. The government takes ownership of homes after owners fail to make their mortgage payments.
A house that has been foreclosed on by the Federal Housing Administration is typically a house in which an owner stops making mortgage payments. Federal housing administration foreclosures are sold “as is, ” meaning the home needs work, but you’ll be responsible for paying for it. Alternatively, you can require repairs to be completed before the government sells or chooses to fix structural issues before you can inspect the house. If you want to view or inspect the house, you may have to make an offer first.
Buying A Foreclosed Property From A Bank
It is also possible to buy a foreclosed home on the open market directly from a bank or lender.
Real estate owned (REO) is an acronym that indicates that property is owned by a bank or lender when you search for property listings. In most cases, once the property is an REO, the bank will remove any liens against it and then evict the previous owner for you.
At this point, the bank has obtained the property at auction and is now selling it to recoup what it owes on the property. It is likely to hire a real estate agent to market it.
Step 4 – Understand Buying A Foreclosed Home For Sale In “As-Is” Condition
“As-is” generally means that the seller won’t guarantee that there aren’t any issues with the property, such as pests, structural defects, or lead paint, for example. In the event of a foreclosure, there’s no one to fix anything, as the property is owned by the bank.
If you’re thinking about buying a foreclosed home, it might be a good idea to have a home inspection before finalizing the deal. This isn’t a requirement for purchasing a foreclosed home, but an inspection can identify structural issues the bank might have missed. Having it helps you determine whether or not to move forward with the purchase or turn the deal down will depend on whether or not you included a home inspection contingency in your contract.
You should try looking for a foreclosure on the lower end of your budget, so you have room to make higher bids.
Step 5 – Get Ready For Potential Roadblocks
No one likes bumpy roads, and buying a foreclosure is often as stressful as it sounds. Selling a short sale also requires approval from the lender, and it can take extra time.
If you can get a home inspection, that’s fine, but if you’re buying at a sheriff’s sale, then you might not be able to request repairs. Also, you’re not going to have the previous owner’s disclosures to rely on. If there is a listing agent, they may not be able to answer your questions.
Buying a house at a low upfront price may cost you dearly once you move in, especially if a house has been vacant for a while. You may also have trouble financing extensive home repairs if your equity is low. A 203(k) loan could be a good choice if you plan to purchase a foreclosed home that needs repair.
Final Remarks: A Step-By-Step Guide For Buying Foreclosed Homes For Sale
Purchasing a foreclosed home might be the answer if you’ve been dreaming of becoming a homeowner but can’t afford to because your budget is too tight. This option allows you to get a below-market rate for the home.
Again, don’t rush into this decision. You’ll want to work with a real estate agent or attorney who can explain both the pros and cons of purchasing a foreclosed home in your community. Consider the additional risk you might be taking on if you go into the foreclosure market before making an offer.