Get An Appraisal And Inspection
Inspections and appraisals are both crucial when it comes to buying a foreclosure. An appraisal is a lender requirement that lets you know how much money a property is worth. Lenders require appraisals before they offer home loans because they need to know that they arent lending you too much money.
A home inspection is a more in-depth look at a property. An expert will walk through the home and write down everything that needs to be replaced or repaired. Because foreclosures usually have more damage than homes for sale by owner, you should insist on an inspection before buying a foreclosed home.
Sometimes, you dont get the chance to order a home inspection or appraisal before you buy. You should only consider buying these types of foreclosed properties if youre advanced at home repair.
Bid Higher If Other Foreclosures Are Selling Quickly
When a foreclosure comes on the market there is frequently high competition, so be prepared to bid fast and high. Theres no exact formula on what the banks bottom line will be, so if foreclosed homes in your area are selling quickly, its important to work with your agent to craft a strong offer, backed up by your preapproval letter if obtaining a mortgage. In many instances, foreclosures are already discounted, so an offer thats too low might be a non-starter for the bank.
Keep in mind that the type of house and location matter, and some homes might sell faster than others. In competitive markets, you might need to offer asking price and keep contingencies to a minimum.
First Things First: Foreclosed Homes Are Sold As
As much as we might like it to be true, theres no such thing as having your cake and eating it too. Buying a foreclosed home is no exception, as theyre nearly always sold on an as-is basis.
What that means in practice is that what you see is what you get. Buyers of foreclosed homes can still conduct an inspection, but the sellerusually a bank or local governmentisnt obligated to make repairs, nor will the sales price be discounted to compensate you for repairs or improvements that need to be made.
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Get Preapproved For A Mortgage
Unless you buy a home at a foreclosure auction, youll probably get a mortgage to fund your home purchase. Once youve found an agent and you get started looking at homes, youll want to get preapproved for a loan. A preapproval lets you know how much you can get in a home loan. Choose a lender and apply for a mortgage preapproval to narrow your search.
Understand The Options For Buying A Foreclosed Home
There are two main ways to purchase a foreclosure:, at an auction or from a lender after they have failed to sell at auction.
Purchase Through Short Sale
A short sale occurs when the homeowner sells a home for less than what they owe on the mortgage because the value has declined. Foreclosure has not been completed. The homeowner still owns the home so you work through their REALTOR®.
When you buy a home in a short sale, the lender needs to approve your offer. You might spend a lot of time waiting for approval.
Purchase At Auction
Youll get a home faster at auction than you would if you negotiated with the bank or a seller. Homebuyers also have the opportunity to buy a property significantly below at auction. However, most auctions only accept cash payments, which means that youll need to have a significant amount of money ready for the purchase.
If the auction does allow for financing through a mortgage, you want to make sure that you have a preapproval ready. Its important to realize that not all approvals are the same. We recommend a Verified Approval1 where your income and assets are verified.
By purchasing at an auction, you also agree to buy the home as-is without an appraisal or inspection. This means you take a big risk when you buy a foreclosed home at an auction. Speak with a real estate attorney if this is something youre interest in.
Purchase From A Lender
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Why Do Foreclosures Happen
“What is a foreclosure?” is an important question for homeowners. But borrowers also need to know why it happens.
Foreclosures occur because your home acts as collateral guaranteeing your mortgage loan. If you don’t pay your loan as promised, the lender can seize the collateral — your house — and sell it to recoup the money they’ve lost due to your default.
The lender has a legal right to take your property via foreclosure because you agree to give them a lien on your home when you borrow the money to buy it. This is why a mortgage is referred to as a “secured loan.” And it’s one big reason mortgage rates are much lower than the rates on unsecured debt, such as most personal loans.
What Is Zombie Debt’ Why Homeowners Are Facing Foreclosure On Old Mortgages
Rose Prophete thought the second mortgage loan on her Brooklyn home was resolved about a decade ago until she received paperwork claiming she owed more than $130,000.
I was shocked, said Prophete, who refinanced her two-family home in 2006, six years after arriving from Haiti. I dont even know these people because they never contacted me. They never called me.
Prophete is part of a wave of homeowners who say they were blindsided by the start of foreclosure actions on their homes over second loans that were taken out more than a decade ago. The trusts and mortgage loan servicers behind the actions say the loans were defaulted on years ago.
Some of these homeowners say they werent even aware they had a second mortgage because of confusing loan structures. Others believed their second loans were rolled in with their first mortgage payments or forgiven. Typically, they say they had not received statements on their second loans for years as they paid down their first mortgages.
Now theyre being told the loans werent dead after all. Instead, theyre what critics call zombie debt old loans with new collection actions.
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Find The Home You Want To Buy
There are several ways to find foreclosures.
You can work with an agent, check out websites that list foreclosures and bank-owned properties, or keep track of local auctions. You may find a list at your local courthouse and some government agencies. Large banks, such as Wells Fargo and Bank of America, also have lists of foreclosure properties. A few of the larger online auctions include auction.com, foreclosure.com, and Bank Foreclosures Sale.
- The U.S. Department of Housing and Urban Development maintains a list of its foreclosure homes.
- Through its HomePath website, you can find foreclosure properties from the Federal National Mortgage Association .
Determine How Much Home You Can Afford
Budgeting matters when buying a foreclosed home. Yes, you might be able to nab your new home at a lower price tag. But foreclosed homes arent free. And despite what you might have heard, you cant buy a foreclosed property for $1 either.
Youll need to craft a household budget listing your monthly income and expenses to determine how much of a mortgage payment you can afford each month.
If you dont do this, you might purchase a home you cant afford even if youre looking for a foreclosure. By purchasing a home thats out of your budget, youll struggle to make your own mortgage payment each month.
As with any home purchase, its important to predetermine your debt-to-income ratio. As the name suggests, this ratio analyzes how much of your gross monthly income your monthly expenses will consume.
Most lenders want your monthly debts to take up no more than 43% of your gross monthly income. If your debt-to-income ratio is higher than that, youll struggle to qualify for a home loan.
Be especially careful when buying a foreclosed home. You might be tempted to buy a foreclosure with a price tag thats at the very top of your budget.
The problem with this is that the foreclosed home might require expensive repairs. If youve purchased a home at the top of your budget, you might not have enough money to afford those needed repairs.
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What Are The Different Types Of Foreclosed Homes
There are essentially two categories of foreclosed homes: bank-owned homes and real estate-owned properties. Both bank-owned and REO homes are under the ownership of the lender, which, in many instances, is a bank. The only distinction is what stage the foreclosure is in.
Bank-owned homes are in the thick of foreclosure, meaning the homeowner has stopped making payments. In turn, the lender has started the legal process to remove him or her from the home. Foreclosed homes are bank-owned properties that eventually go to auction, where the bank tries to recoup the money for the property.
If the home doesnt sell, its still bank-owned, but it is now known as an REO home. REO properties have already gone through the auction process and remain unsold. The bank or lender retains ownership and tries to sell these properties, oftentimes through REO real estate agents.
Look At Comps To Determine What To Offer
Finding the right price to offer is as much an art as it is a science. Your agent can run a comparative market analysis , which helps you understand recent sale prices of comparable properties, or comps.
Soffee says he runs a CMA from the last 180 days and evaluates several factors, including the pace of home sales, tax assessment history and a deeper analysis of similar properties nearby that have recently sold.
If youre up against cash offers, knowing this information can help ensure your offer is a competitive one. Your lender will require an appraisal to assess the homes value, so keep that in mind when making your offer, as well. If theres a shortfall between your offer and the homes appraised value, you might have to make up the difference in price if the bank doesnt budge.
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Which Will Keep You In Your House Longer Foreclosure Or A Short Sale
Both foreclosures and short sales will result in the loss of your current home, but there are differences. Foreclosures can involve a long legal process, and that may give you some extra time in your home, but once the foreclosure is complete, you may be required to leave immediately. Short sales give you a bit more flexibility to negotiate the terms of the sale.
Be Prepared To Commit To A House As
Foreclosures are mostly sold as-is, which means any repairs are your responsibility. You could request a repair in some cases, but the entity owning the home may not be willing to credit you for it. Because the foreclosure market is competitive right now, you might have to place an offer or bid before viewing or inspecting the home.
If there are material defects with the home, like plumbing or the roof, you as the buyer are responsible for that. You take that on as your own risk, and youre doing it because youre getting such a good price for the home, Charlie says.
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How Long Does Foreclosure Take
Properties foreclosed in the second quarter of 2021 had spent an average of 922 days in the foreclosure process, according to the U.S. Foreclosure Market Report from ATTOM Data Solutions, a property data provider. This is down slightly from the previous quarters average of 930 days, and up 34.5%, from 685 days, in the second quarter of 2020.
The average number of days varies by state because of differing laws and foreclosure timelines. The states with the longest average number of days for properties foreclosed in the second quarter of 2021 were:
The graph below shows the quarterly average days to foreclosure since the first quarter of 2007.
Find An Experienced Real Estate Agent
Foreclosures can be difficult to find and price, so try to work with a real estate agent that specializes in them. An agent who is knowledgeable about the foreclosure process can represent your interests and keep the transaction moving. One strategy for finding the right agent is to visit websites with a database of foreclosed homes in your desired area. Look for Realtors who have specialized real estate training in this area, such as the Certified Distressed Property Expert or the Short Sales and Foreclosure Resource designations.
Buyers can also work directly with the banks real estate agent instead of using a buyers agent to save on the commission split. This can be a risk, though: Buyers feel more secure when they are represented, Soffee says.
Your agent can guide you through various types of distressed sales. These include:
- Preforeclosures, in which a buyer bails out a seller before the bank takes the property
- Short sales, in which the borrower owes more than the home is worth and the bank agrees to forgive some of the debt
- Public auctions, in which bidders have a chance to make offers on foreclosed properties at the local courthouse
- Bank-owned homes, which belong to the lender
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Title Search And Tax Lien Issues
In most jurisdictions, it is customary for the foreclosing lender to obtain a title search of the real property and to notify all other persons who may have liens on the property, whether by judgment, by contract, or by statute or other law, so that they may appear and assert their interest in the foreclosure litigation. This is accomplished through the filing of a lis pendens as part of the lawsuit and recordation of it in order to provide public notice of the pendency of the foreclosure action. In all U.S. jurisdictions, a lender who conducts a foreclosure sale of real property that has a federal tax lien must give 25 days notice of the sale to the Internal Revenue Service. Failure to give notice results in the lien remaining attached to the real property after the sale. Therefore, it is imperative the lender search local federal tax liens, so that if parties to the foreclosure have a federal tax lien filed against them, the proper notice to the IRS is given. A detailed explanation by the IRS of the federal tax lien process can be found.
How Are Foreclosures Different From And Similar To Buying Other Properties
The primary difference between buying a foreclosure and a regularly listed property is that with a foreclosure, the seller is the bank. This will impact all aspects of the selling process. The time frame is much shorter than with a traditional sale, so you need to be ready to buy with financing already secured.
When foreclosed properties are sold at an auction, cash is usually required. This may just be a larger down payment with the remaining balance to be paid by a certain date, or it could mean paying for the entire purchase up front.
In other cases, properties have already been through an auction and the bank was the winning bidder. These properties, called real estate owned , can be purchased through a real estate agent similar to a traditional purchase.
Another big difference is that you are buying the property as is. You should still get an inspection in fact, a thorough inspection is recommended to determine what issues the property may have. Previous owners may have left the home in a bad condition or taken things of value before they vacated. In other cases, an empty home may have invited vandalism or theft that isnt obvious without a sound investigation from a knowledgeable inspector.
If you are not familiar with the foreclosure process, it is a good idea to work with a real estate agent who knows the process well or an attorney specializing in the area. You also need to get preapproved and let your lender know you are focusing on foreclosures.
Did you know?
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What Is Foreclosure Homes Mean And How It Work
Just the word foreclosure is enough to strike fear into the hearts of homeowners. The idea of losing the place we call home because we have fallen behind on our mortgage payments is a terrible one. On the other hand, the word foreclosure is exciting to eager homeowners seeking an investment property. The problem is that many people, including real estate professionals, are confused about foreclosures.
Generally, having to foreclose on your home is disappointing, but it is not the end of the world. Once you understand what the foreclosure process entails and know what steps to take before, during and after a foreclosure, you will feel more prepared. Plus, those who are considering investing in a foreclosure property will have a better idea of what the process looks like and what to expect during the sale of a foreclosure home.
Tips For Your Home Search
- Buying a home is a massive investment, and a financial advisor can help you fit it into your long-term plans.
- Finding a qualified financial advisor doesnt have to be hard. SmartAssets free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If youre ready to find an advisor who can help you achieve your financial goals, get started now.
- If youre planning to buy a foreclosure by using a specialized government loan, such as a VA loan, FHA loan or USDA loan, make sure you do your research before you dive into the foreclosure market. Government loans come with certain housing standards to meet. That means you wont be able to get just any foreclosed home. In general, itll have to be in relatively decent shape.
- Before you even start the home hunt, its important to know how much house you can afford. Starting the house search with a number in mind can help keep your expectations in order.
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