Pros And Cons Of Buying A Foreclosed Home
As we mentioned, foreclosures and sales of foreclosed homes are rare in Canada and are more common in the United States. That said, it does happen and there are ways that you can buy a foreclosed property, which involves a different procedure than a traditional mortgage. However, before you start looking into buying a foreclosed home, its important to understand the inherent benefits and risks involved.
Pros:
- The lender, eager to recuperate their loss, will want to sell the property quickly. They may even sell it at a lower price than it was initially. If you buy the house at auction, its sometimes possible to get an even lower price.
- Any liens, backdated taxes, or outstanding mortgage payments remaining on the property will be expunged, as these factors would make it harder for the lender to resell the home.
- This option can be beneficial if youre a landlord with plans to buy and fix up cheaper properties and then rent them out.
- If the property goes for a cheaper price, you can use the money youve saved for maintenance purposes or to making home improvements, thereby increasing its value and your home equity in the process. You may even be able to sell the property at a profit some day.
Cons:
Heres what you should know about land transfer taxes in Ontario.
Foreclosure Auctions In New York: 7 Tips For Buyers
More homes than you expect end up in foreclosure.
The actual numbers vary from quarter to quarter and year to year, but there are always plenty of foreclosed properties available on the market, especially in a city like New York that houses over 8 million residents.
While this doesn’t bode well for the homeowner who can’t pay their mortgage, it could also mean an opportunity for a savvy buyer to purchase an apartment or home for below market value.
But first, you need to know what you’re actually doing.
To buy the right foreclosed home you need to know how to spot the red flags and know what resources you have to equip yourself with.
Prepare Your Paperwork And Credit Score
When it comes to buying a foreclosed home preparation is the name of the game, and that applies to more than just knowing the home.
You’ve got to know your finances and credit score too to get a great deal.
If your credit score is less than ideal, read up on our guide on how to improve your credit score.
Banks will expect to see your pre-approval letter with your bid.
And without that preapproval letter, you won’t be ahead of the competition and you certainly won’t be able to compete with someone who’s paying in cash.
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Fha Short Sale Seasoning Requirements
The time it takes to get an FHA home loan after you have had a short sale depends on your circumstances during the short sale. A borrower is not eligible for a new FHA-insured mortgage if they pursued a short sale agreement on their principal residence simply to:
- take advantage of declining market conditions, and/or
- purchase a similar or superior property within a reasonable commuting distance at a reduced price as compared to current market value.
Can You Foreclose On A Dead Person
The death of a house owner does not necessarily need to affect his mortgage. It remains in full force and effect in many instances, and the terms remain the same. The mortgage lender can foreclose, just as it could during its lifetime if no one makes the loan settlement after the death of the house owner.
However, if someone makes the payment, nothing typically changes. The liability for the payments usually comes down to the terms of the will of the deceased.
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Deed In Lieu Of Foreclosure
When a loan modification isnt an option, pre-foreclosure can also involve a deed in lieu of foreclosure, Richardson says. That means homeowners who are behind on their mortgage hand over their houses deed to the bank to settle their debt and walk away.
A lender has to agree to the option, and whether or not a bank will agree to it depends on a number of variables, including the current housing market. In a rising market, Richardson says, banks have time on their side and the possibility of selling your home for more than theyd get from your paying off your mortgage anyway.
If a lender agrees to a deed in lieu of foreclosure, pre-foreclosure ends. The process doesnt reach official foreclosure.
Buying A Foreclosure From A Real Estate Agent Is A Good Idea
If the foreclosure auctions end without the home being sold, then the home becomes a “real-estate-owned” property.
That’s just a property the bank holds onto in order to sell later.
The advantage of buying an REO property is that the bank may fix the worst problems and even procure a real estate agent who excels at helping.
And, just as importantly, you’ll actually be able to go inside.
Find out how a real estate attorney can help you purchase a foreclosed property
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How To Find Foreclosed Homes
Think back to the collapse of the housing market of a decade ago, when borrowers defaulted on subprime mortgages in high numbers, and millions of homes went into foreclosure as a result. Foreclosures and short sales flooded the market.
But those days are over, at least for now. Charlie says theres tough competition for what few properties remain on the foreclosure market nowadays. And youll need cash, or you risk losing to investors who can come up with the funds quicker.
Pre-COVID, the economy was very strong, and you were lucky to find a short sale or a bank-owned foreclosure, Charlie says. Not saying they didnt exist, they did, but they were harder to come by.
Finding foreclosures may be a little more challenging in strong real estate markets, but its possible. You can start by sifting websites that now specialize in homes and properties in foreclosure, like Fannie Maes HomePath.com. Some banks, such as Bank of America, have online databases that can also help you search for a foreclosed home.
Leveraging a real estate agent is going to be your best bet for finding foreclosed homes. A real estate agent will be able to find foreclosure property listings for you on the Multiple Listing Service a database of real estate listings that consumers cant access directly.
Foreclosure In A Nutshell
Foreclosure is an often-lengthy legal process when a bank or lender repossesses a home in which the homeowner has defaulted on the payments. The bank takes ownership of the home and then sells it at auction. Foreclosure commonly comes about because a homeowner has failed to make mortgage payments, but it can happen for other reasons too, like unpaid property taxes. There are two types of foreclosure judicial and nonjudicial and both federal and state law, as well as the homeowner’s own mortgage documents, dictate the process and timeline.
From a purchaser’s perspective, foreclosure has three distinct stages: pre-foreclosure, auction and post-foreclosure. Homes can be purchased during any of those three stages. During the pre-foreclosure period, you are purchasing from a struggling homeowner trying to fend off foreclosure. In the other two stages, you are working with a bank that has wound up with a property on its ledgers instead of a mortgage. The home’s location, the reason it’s in foreclosure and where it is in the foreclosure process all affect a buyer, because these details confer certain rights on the homeowner, and create potential complications for the prospective sale.
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Loan Modification In Pre
A loan modification is a popular means to save your house when youre struggling to pay your monthly mortgage. You can request that your lender extend the length of your loan, so youre responsible for paying less each month. Lenders may also opt to lower the interest rate or allow you to tack your missed payments onto the end of your loan.
If it looks like a modification can be arranged, its in a lenders financial best interest to work with homeowners to keep them in their home. Then the bank doesnt have to go through the hassle of completing the foreclosure process, evicting the homeowners, and likely having to sell the home to get back its investment. If a loan modification deal is reached, then pre-foreclosure ends, and the homeowners go back to making regular payments on their loan.
Borrower Current At The Time Of Short Sale
A borrower is considered eligible for a new FHA-insured mortgage if, from the date of loan application for the new mortgage, all
- mortgage payments on the prior mortgage were made within the month due for the 12-month period preceding the short sale, and
- installment debt payments for the same time period were also made within the month due.
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Find An Experienced Foreclosure Agent
Some pitfalls come with foreclosed homes, so youll want to work with a realtor or foreclosure specialist who has experience navigating the process and knows the local market. If youre interested in an REO property, youll likely work directly with the banks broker in many cases.
An experienced agent can help you determine when a foreclosed home is offered at a bargain price, and when its not worth the risk involved. Every state has its own set of laws and regulations concerning foreclosures, and an expert can help you understand them to avoid hefty costs down the line.
The cost of closing, repairs, and property taxes can turn a bargain house into a money pit. The bank may also hold you financially responsible for any property debt that wasnt paid by the previous owner. Working with an expert can help you understand what your financial obligations are beyond the mortgage.
It doesnt cost you a lot to use the right realtor, but it could cost you a lot to use the wrong one, Enriquez says.
Lastly, know that the previous owner might have the right to redeem a foreclosed property. Many states in the U.S. give homeowners this protection, which allows them to reclaim their foreclosed home as long as they can repay their debt within a certain period of time.
But it doesnt happen often. Many people whove gone through foreclosure arent typically able to come up with money quickly to repay the outstanding mortgage balance and any extra costs incurred during the process.
Communicate With Your Lender
If you know that you are going to have trouble making your mortgage payments, contact your lender immediately and let them know you are having financial difficulties. This allows your lender time to work with you to create a plan. Remember, do not stop paying your bills, and do not wait until you cannot make payments before you act. Learn how to talk to your lender about trouble making payments.
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Why House Hunting In Colder Weather May Be Better For Your Bank Account
This is Part 3 of a 5-part series for first-time home buyers. Missed the first two articles? Catch up on Part 1 and Part 2.
When it comes to buying a home, is there ever a âperfectâ time? Determining when to buy a house depends on your unique situation. However, if youâre looking to get the best possible price and save money , consider waiting for the best time of year to buy a house: fall or winter.
Is there a chill in the air? Start house hunting!
The real estate market tends to cool down in the winter. People are less active so thereâs a good chance at avoiding a bidding war, but inventory may be low, so you may have to wait a few months to see a home you want.1 In addition, research suggests that buying a home in January will cost a buyer on average 9% less than buying the same home in June.2 For a $200,000 home, that can mean a whopping $18,000 in savings. That may equal extra cash to put toward one of the items on your wish list.
One reason? The housing market and the school system go hand in hand. Since families tend to avoid moving when class is in session, the busiest real estate seasons are during the spring and summer, when children are on break so they can adjust to a new area before school starts.3
Sellers who leave their homes on the market during fall and winter are most likely âreally motivated.â If youâve been binge-watching house hunting shows, you know that means that buyers may be willing to accept a lower offer and you could save more.
Economic Factors Driving Foreclosures
Foreclosure rates across the nation are likely to increase substantially over the next few years due to the coronavirus pandemic. Despite the governments efforts to prop up the economy, job losses and unemployment claims have rapidly escalated to historically high levels. The resulting mortgage defaults on both residential and commercial real estate is inevitable.
Generally, foreclosures will rise when the national or global economy goes through a downturn.
Using the Great Recession after the financial crisis of 2007-2008 as an example, home owners could no longer afford the mortgages on their homes. Certain states, continued to have high foreclosure rates due to economic conditions tied to those areas. When a major employer lays off a large number of workers, or goes out of business, the local economic effects can be long-lasting.
Other factors beyond job losses are also highly relevant to foreclosure rates.
For example, an aging population with high medical bills can lead to high foreclosures. Low income or blue collar areas dependent on a few key employers can suddenly see foreclosure rates spike if these companies face trouble. As a result, foreclosure rates are not necessarily tied to the state of the national economy or real estate market cycles.
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Who Takes On Your Mortgage Debt When You Die
Typically, when you die, debt is recovered from your estate. This means that the executor of your estate will first use those assets to pay off your creditors before any assets can be passed on to the heirs.
However, with mortgage debt, the process is different. Nobody is required to take on the loans unless someone has co-signed the loan or is a co-borrower with you. However, if the individual who inherits the home decides that they want to maintain it and take over the mortgage responsibility, there are laws in place that allow them to do so. Or while they make arrangements to sell the home, the surviving family members may make payments to keep the mortgage current.
If nobody takes over the mortgage or makes payments when you die, then the mortgage servicer will begin the foreclosing process on the home.
There’s More To The Numbers Than Seen At First Glance
A 7x jump sounds massive, but even a small uptick in foreclosures would have been a notable increase when compared to recent levels. Moratorium protections that prohibited lenders from initiating foreclosures during the pandemic in 2020 and 2021 resulted in the lowest number of foreclosure filings since this data has been tracked on a national level.
Today’s foreclosure starts, while much higher than recent past, are still below pre-pandemic levels — by a lot. In 2021, there were a total of 151,153 foreclosure filings for the entire year, which was 69% less than pre-pandemic levels in 2019. For the month of January, there were 56,251 foreclosures filed in 2019, 58% more than the number filed in January 2022.
Foreclosure filings are continuing to rise month over month, with February 2022 seeing 25,833 new foreclosures, an 11% increase from January 2022, which is welcome news for distressed real estate investors. But the numbers aren’t necessarily a red flag for the housing market.
Image source: Getty Images.
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Possible Exclusivity For First
Homes sold by Fannie Mae, Freddie Mac, and HUD typically hit the market with a special period in which priority is given to first-time homebuyers, says Cedric Stewart, a 13-year veteran real-estate professional for Keller Williams in the Washington, D.C., area. This provides a great opportunity for new buyers and eliminates a significant portion of the competition theyd face if bidding on a short-sale or some other type of home elsewhere.
What Is Foreclosure
Foreclosure is the legal process by which a lender attempts to recover the amount owed on a defaulted loan by taking ownership of the mortgaged property and selling it. Typically, default is triggered when a borrower misses a specific number of monthly payments, but it can also happen when the borrower fails to meet other terms in the mortgage document.
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Real Estate Market Cycles
The real estate market goes through cycles and an investor can learn how to profit from this. Housing market trends are subject to various pressures, including the rise and fall of mortgage rates, ease of access to credit and new laws and government initiatives that impact homeownership.
Along with this, general economic booms and downturns affect the real estate market. The best time to invest in real estate is usually opposite to the best time to sell property. So youre generally looking to buy properties at foreclosure auctions when the general economic cycle is down.
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