An Inside Look into the Process of Buying a Foreclosed Home
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So you’re interested in buying a foreclosed home?
When shopping for a new home, taking a look at foreclosed homes is a great way to save a big chunk of money. Traditionally, a foreclosed home will have an asking price that’s substantially less than other homes on the market.
Yet, the process of buying a foreclosed home can be a bit tricky for the uninitiated.
Keep on reading for our full breakdown of how to buy a foreclosed home, and the steps you need to take before you can take your first step into your new house.
The Process of Buying a Foreclosed Home: Which Type of Foreclosure?
Before taking a deep dive into the different processes for buying a foreclosed home, you’ll need to identify the actual stage of foreclosure first.
There are four different types of foreclosure, and each one has unique properties that you have to keep in mind. For instance, properties can still be owned by their original homeowner, but still be considered a pre-foreclosed home at the very first stage.
Let’s take a look.
At the pre-foreclosure stage, the mortgage lender has just notified their borrowers that they’re in default. This is the very first step before the property is offered for sale at auction.
If the homeowner has a buyer on stand by, they can sell their property at this stage, where they can avoid the whole bulk of foreclosure proceedings.
For these kinds of homes, you’ll be able to find them listed in county and city courthouse buildings, or online.
The next type of foreclosed homes can be found in short sales.
In the simplest of terms, a short sale happens when the lender is willing to come to the negotiating table and accept less for the property than what is originally owed on the mortgage.
In this case, the borrowers don’t actually need to be in default for the lender to agree to a short sale. However, there must be a solid reason behind wanting a short sale.
Generally, these can span all types of financial hardships, or the residence itself is underwater, which means that the property is actually worth less than the outstanding mortgage balance.
You can find these properties listed as short sales, with a glaring “pending bank approval” attached.
Do you know what happens to foreclosed properties that don’t sell at auction?
Well, they go back to the bank and get listed as real estate owned (REO) properties. These types of properties tend to be managed by the financial institution’s specialized REO department.
You can easily find this type of property online, listed as REO or bank-owned properties.
For properties that were purchased using loans guaranteed by the federal government’s Federal Housing Administration (FHA) or even the Department of Veterans Affairs (VA), these properties are repossessed by the government when they go into foreclosure.
This is a special type of property that can only be sold by brokers that work for the federal agency or they’re government-registered brokers. You can take a look at these properties by checking out the U.S. Department of Housing and Urban Development (HUD) website.
How to Buy a Foreclosed Home
At this point, you’ve probably gotten a pretty solid understanding of what the market has to offer when it comes to foreclosed homes.
Let’s take a look at the steps you need to take before buying a foreclosed home.
Step 1: Getting Mortgage Preapproval
Before even creating a list of foreclosed homes that you’re interested in checking out, you’ll want to tackle getting preapproved for a mortgage first.
Of course, the fastest way to purchase a home would be by paying in cash. However, that’s usually not an option for most homebuyers. Therefore, you’ll want to go through the process of prequalification, and getting preapproval on a mortgage before you start searching in earnest.
Step 2: Hire a Broker or Agent With REO Specialization
As we’ve previously discussed, if you’re looking at government-owned properties, then you have no choice but to contact a government-registered broker.
If you’re looking at other types of foreclosure homes, you’ll still need the expertise of a real estate agent that specializes in REOs. The buying process of foreclosure homes can become quite convoluted, and you’ll want to save time and money by having a specialist on board.
Step 3: Buy a Foreclosed Home
Depending on the recommendation of your agent, and after checking this home buying checklist, you can start bidding at an auction, or start negotiations for an REO.
Afterward, you can put an offer on a home that fits the lower range of your budget. You’ll have to keep in mind that you’ll still have to pay for inspection costs, closing costs, insurance, renovations, and repairs, as well as property taxes.
Therefore, be conservative in your bidding.
Step 4: Home Inspection and Resolve Liens
Now you’re ready for arranging a home inspection. After checking whether you’re allowed to do so after putting an offer on the house, you’ll want to have a reputable inspection service come in and do a thorough scan of the house.
If the inspection looks good, you’ll want to start taking a look at the remaining liens on the house. Unfortunately, some foreclosed homes can have more than one loan, so you’ll have to deal with a solid title company (with the help of your broker, of course) to go through the liens, and ensure that there are no surprises remaining.
Once you’re done, and you feel good about the deal, you’re ready to move into closing procedures and get the keys to your new home.
Ready to Buy the Home of Your Dreams?
While the process of buying a foreclosed home can look a bit scary at first, we hope that our guide was able to shed light on the whole procedure for you.
However, your home buying journey doesn’t have to be painful. As a matter of fact, it should be fun and knowledgeable. You can check out our mortgage and real estate sections for more tips and tricks that can teach you and keep you up-to-date with the latest real estate news.