If you’ve been browsing home buying sites like Zillow or have been making your rounds at open houses, you may have come across listings for foreclosed homes. Buying a foreclosed home means buying a property in which the previous owner defaulted on their mortgage payments. Because the property is collateral for the loan, the lender has the authority to seize the home, to recoup some of what they may have lost from the mortgage.

Typically, buyers can purchase the property for a price much lower than market value, making foreclosed homes appealing to those on the market for a new home. However, despite their attractive price tag, there are some downfalls of this transaction that buyers should consider before buying a foreclosed home.

How to purchase a foreclosed home

While the process of buying a foreclosed home is somewhat similar to a conventional purchase process, some differences need to be understood by the buyer to determine if this type of transaction is right for them.

1. Determine the type of foreclosure

There are several different types of foreclosures a buyer may come across in their home search. The most common types include:

• Pre-foreclosure.

The lender has given the owner notification of impending foreclosure, resulting in the owner attempting to sell the home in an auction.

• Short sale.

This doesn’t mean a “fast” sale; it means the bank is agreeing to sell the property “short” of the loan. These usually occur when the home is worth less than the outstanding balance of the mortgage. While a short sale is not the same as a foreclosure, it fits in the category of a distressed sale. For this transaction to go through, the lender must agree to sell the home for less than the mortgage, meaning they will take a loss. This type of transaction can potentially take months for lender approval.

• Bank-owned properties (REO).

If a home goes up for auction but does not sell, it becomes a Real Estate Owned property, possessed by the lender.

• Government-owned properties.

If a borrower defaults on an FHA, USDA, or any type of government-backed loan, the government will take possession of the home. The home is then sold through brokers within the government agency.

2. Secure funds or financing

Cash buyers often purchase foreclosed homes since they aren’t always in the best condition. However, if cash is not an option, you could consider financing the foreclosure with a renovation loan. (*Due to COVID-19 guideline changes – renovation loan products are restricted. Contact us for details.) And if the home is in good condition, it’s likely than you can move forward with traditional financing options. Consult with your OVM Financial loan officer to determine which financing option would work best for the home that you have in mind.

3. Work with a real estate agent familiar with foreclosures

It’s always recommended a buyer seek out the assistance of a reputable real estate agent. If you have gained interest in foreclosed homes, make sure your chosen agent has a background in handling those transactions. This will help with any questions you may have along the way and ensure you’re going through the process smoothly.

4. Make an offer and close

If you’ve found your dream home, it’s time to make an offer! You’ll make an offer similar to how you would with a standard home purchase, and once the seller (in this case, sometimes the lender) accepts, it’s time to go through the closing process. Just be sure that you have enough funds set aside to cover costs such as closing costs, inspections, insurance and agent fees.

5. Have a property inspection

This is an extremely important step in the homebuying process, especially if you’re purchasing a foreclosed home. In a typical home sale, if the inspector finds big problems with the property, it can sometimes be negotiated with the seller to cover the cost of repairs. However, with a foreclosed home, the lender’s goal is to recoup as much of their loss as possible and they will not cover the costs of any major repairs needed on the home. If you are comfortable with covering the costs of any major repairs, it’s important to have funds set aside for those.

The pros and cons

Pros

• There is potential for a very low purchase price.
• Similar process to a conventional home, but at a lower cost.
• The lender will clear the title for you.

Cons

• Competitive market with cash-buyers.
• Potentially long process, especially if it is a short sale.
• Sales are as-is and many repairs found in an inspection will not be covered by the lender.

The bottom line

While the attractive prices of foreclosure can reel in potential homebuyers, sometimes the pitfalls of this type of sale are not suitable. It’s important to thoroughly consider all of the details when purchasing a foreclosed property to ensure the transaction fits your financial situation.

As always, we’re here to answer any questions you have and help guide you through the process!