Buying foreclosed homes is a good way to get a house for less than what it is worth. However, if you are not careful, it can also be a risky venture. So, how to buy foreclosed homes? In this post, Hanfincal will go over all the details about buying foreclosed homes.
1. What Is A Foreclosed Home?
A foreclosure happens when a house is retaken and put up for sale by the lender. When you see a house listed as foreclosure, it implies that the lender possesses it.
Each mortgage contract has a lien on your property, and a lien permits your lender to control your house if you stop making mortgage payments.
2. Difference Types Of Foreclosed Homes
Property is in pre-foreclosure after the lender has informed the borrowers that they are in default; in advance, the property is offered for sale at the auction. If a house owner can sell the property during this time, they might be able to avoid a certain foreclosure proceeding and its negative influence on their prospects and credit history.
Pre-foreclosed houses are generally listed in county and city courthouse constructions. Moreover, most online resources list properties that are in the pre-foreclosure phase.
2.2. An Auction
The conventional way to purchase a foreclosure house is at a real estate auction. At the auction, third-party trustees administrate a sale of houses that lenders or banks have owned after the official house owners defaulted on their mortgage loans.
Purchasers can buy a house fast (and usually for a reasonable price) at an auction; however, there are hurdles, too. One instance is that the auction generally asks purchasers to have cash on hand.
Moreover, there are many risks, including:
- A house you purchase at the auction may have a lien on its title from a government agency, particularly if the previous owners stopped paying property taxes.
- A house purchased at an auction may ask for expensive improvements.
- You might not have the opportunity to order an appraisal on the house. During an appraisal, a real estate appraiser identifies how much a house is worth in the current housing market. Without an appraisal, you manage the risk of paying for the house even if you purchase it at an auction.
2.3. Government-Owned Properties
You may consider purchasing government-owned foreclosed properties. These properties are familiar with the ones possessed by lenders or banks, and government agencies commonly own houses after the owners default on mortgage loans guaranteed by the federal government.
For instance, when owners stop paying on the house they financed with an FHA loan, the US Department of Housing and Urban Development (HUD) possesses the foreclosure house. Government-owned foreclosures are often sold “as-is,” which implies that any improvements are your duty. In some circumstances, the government might fix structural needs before selling, or you can require a repair. You may have to offer or bid before viewing or checking the house.
2.4. Bank-Owned Properties
Properties that don’t sell at the auction turn back to the bank. Since this time, they have become real estate-owned (REO) properties.
The institution’s REO department usually runs these properties. Online resources have extensive listings of bank-owned properties that you can search by state, ZIP code, or city.
3. How To Buy Foreclosed Homes In 6 Steps?
How to buy homes that are foreclosed? How to buy a house in foreclosure? Here are the 6 steps to helping you purchase a foreclosure house.
Step 1. Determine Your Home Budget
You need to craft a household budget listing your income and expenses each month (consisting of evaluating for discretionary expenses like entertainment and eating out) to identify how much of a monthly mortgage payment you can afford.
With any house buying, it is essential to predetermine your DTI ratio (debt-to-income). As the name suggests, this rate analyzes the amount of your gross income and expenses monthly (consisting of your evaluated new mortgage payment) will use.
Many lenders want your debts to take up no more than 43% of your monthly gross income. If your debt-to-income rate is higher than that number, you will experience to qualify for a house loan.
Be careful when purchasing a foreclosure house. You may be attracted to buying a foreclosure with a price tag at the very top of your budget.
The issue with this case is that the foreclosure house may require expensive improvements. If you have bought a house at the top of your budget, you may not have enough money to handle those needed repairs.
Step 2. Get An Real Estate Agent
If you decide to buy a foreclosure, you will want to seek an experienced real estate agent who has access to many local listing services and knows the regional market.
This agent can assist you in determining when a foreclosure house is offered at a bargain price or when it is listed at a required price that is too high for the risk related. An agent might help you seek foreclosure properties that other purchasers might miss.
Moreover, a good real estate agent can discuss difficulties you can go through with a foreclosure property. Remember that each state has unique laws concerning foreclosures. It is important to work with an expert who understands the regulations.
Step 3. Get Mortgage Pre-approval
If you don’t purchase a house at a foreclosure auction, you will take a mortgage to fund your house purchase. When you have found an agent and start looking at houses, you will want to get preapproved for a loan. A pre-approval lets you know the amount of money you can get in a house loan. Select a lender and apply for a mortgage pre-approval to limit your search.
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Step 4. Find A Foreclosed Homes
You will see properties marked as pre-foreclosure or foreclosures on the MLS and real estate listing websites that pull from the MLS.
Auctioneers are legally asked to post notices of sheriff’s auctions before the sale. This implies there is a sign on the property and perhaps, more easily sought, a notice in the local newspaper. Many counties and cities host larger auctions, which might consist of empty construction lots or previous municipal buildings.
Government agencies and government-sponsored enterprises sell foreclosure houses. Their sales have a tendency to be geared toward first-time house purchasers who make an intention to be owner-occupants rather than real estate investors.
Are you looking for a suitable foreclosed home? View some websites providing foreclosed house listings below:
viewforeclosurehomes.com is a website that serves the largest database of foreclosures in the industry and updates it every day.
Check out these exclusive foreclosure listings HERE!
viewhudforeclosures.com is one of the largest databases of nationwide foreclosures and offers online tools to support you with the process.
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Step 5. Make A Competitive Offer
Work with your agent to get an idea of comparable house prices so you can place an intelligent offer suitable for your budget. In a live auction, you want to know your limit; however, even if you purchase a house that has been bank-owned for some time, you will want to be strategic.
You might need to offer the total price in a real estate market. However, a lowball offer may not fly even in a more balanced market. The bank might be asking what it considers a fair market price and unwilling to go below. With the auction website, you might need to reach a reserve price for your offer to be considered.
Step 6. Get A Home Inspection
If you make a plan to purchase a foreclosure house, get a house checked, so you know accurately what you are in store for. Checking is not required to purchase a foreclosure house; however, it can identify the main problems the bank is not aware of. It will assist you in deciding whether to move forward with the buying or drop out of the deal (offered you include a house checking contingency in your contract).
Looking for a foreclosure house on the lower end of your budget is brilliant, so you have room to raise your bids and pay for necessary improvements.
4. The Pros And Cons Of Buying Foreclosed Homes
After answering the question “How to purchase a foreclosed home?”, you need to know the pros and cons of purchasing foreclosure houses.
4.1. The Pros
Here are a few benefits of purchasing a foreclosure house, including:
- Reduced prices: An undeniable benefit is that foreclosure houses almost always cost less than other houses in the region or are listed below market price. This is because they are valued by the lender, who wants to get the house off their books.
- Common loan configurations: You may have to follow a slightly different bidding and purchasing process when you purchase a foreclosure; however, you still have a few loan selections as long as it is not a cash-only auction. As long as the house you consider is in habitable condition, you can get a traditional loan or government-backed VA loan, USDA loan, or FHA loan to purchase it. Government-backed loans can be more affordable; however, if the property is damaged, the government may ask for work to be done.
4.2. The Cons
Here are some drawbacks of buying a foreclosed home below:
- Complicated process: Purchasing a distressed property requires more specialized knowledge compared to a typical transaction.
- Enhanced repairs: Foreclosure houses usually need work. Struggling house owners may ignore routine maintenance; therefore, the upgrade bills can be expensive.
- Stiff competition: Foreclosures are generally the purview of professional investors and are always uneasy against them.
How to buy foreclosed homes? Just follow the six steps above, you can purchase a foreclosure home at a reduced price. When you seek a preferred house, get an appraisal and property checking completed. You need to guarantee funding with a mortgage pre approval. Besides, you follow up with your agent and lender to finalize the sale when your inspection results look acceptable. Hanfincal hopes this article has been helpful in letting you know about purchasing foreclosed houses.
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