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If you’re trying to find a good deal on a house, or move into a neighborhood that’s just outside your price range, you might consider buying a foreclosed home. While these homes tend to have lower price tags, buying a home out of foreclosure comes with risks.
Here are some tips for how to buy a foreclosed home safely.
What’s a foreclosure and how does it work?
Foreclosure occurs when a homeowner fails to make payments on their mortgage, and the lender repossesses the home. The lender typically sells it to recoup the money it invested in the loan — often for much less than the market price. Foreclosures may also happen if a homeowner doesn’t pay their property taxes. The rules for foreclosure vary from state to state, but the general process is the same.
When you’re delinquent on your mortgage payments, late fees start to accumulate after 10 to 15 days. After 30 days, you’re officially in default, and the lender will often try to work with you on a plan to catch up on payments.
The legal foreclosure process generally can’t start until 120 days after the first missed payment. Before that, the home is in “pre-foreclosure.” During this time, the lender is required to send you an official document listing all past-due payments, any other charges required to bring a loan current, and a contact person you can speak with to discuss options to avoid foreclosure. You may also agree to sell the home to avoid foreclosure.
If all this fails, the home moves into foreclosure proceedings. Some states use a judicial foreclosure process, in which the mortgage lender sues the homeowner and then the court system oversees the repossession. If payment isn’t received, the home is sold at auction to the highest bidder by the court or sheriff’s office.
In other states, a “power of sale” clause in the mortgage contract governs the foreclosure process. The lender must send out a notice requesting payment. After a waiting period, the mortgage company will auction off the home.
With Credible, you can compare mortgage rates from various lenders to help you buy a foreclosed home.
Ways to buy a foreclosed home
There are five main ways to buy a home in foreclosure. In each case, the process is slightly different, but all offer the opportunity to get a good deal on the purchase price.
- Pre-foreclosure: Before moving to formal foreclosure proceedings, a lender and homeowner may jointly agree to sell the home to avoid foreclosure. These sales often must happen quickly.
- Short sale: In a short sale, the home is sold for less than the balance of the mortgage. The lender may agree to a short sale to avoid going through the foreclosure process.
- Auction: Once a foreclosure is complete, the home is sold at an auction conducted by the court system, sheriff’s office, or mortgage company. You can bid on the home during the auction.
- Purchase from a bank: The lender may choose to buy the property in the foreclosure auction and then resell it on the open market. If the home doesn’t sell at the auction, it goes back to the bank or lender. Homes sold by the lender are “real estate owned.”
- Purchase a government-owned property: The government may take possession of a home after foreclosure if the home had an FHA loan or if a property tax auction doesn’t get a buyer. These homes may be owned by the U.S. Department of Housing and Urban Development or by the local government.
Tips for buying a foreclosed home
Buying a home in foreclosure can pose risks you won’t encounter when buying a house in a traditional home sale. It’s important to be strategic in how you move forward. Follow these steps to successfully buy a foreclosed home.
Determine your budget
Before you look for foreclosed homes, examine your monthly income and expenses and determine how much you can reasonably afford. Keep in mind that foreclosed homes may require more costs, so be sure to leave room in your budget for these expenses.
Hire a real estate agent
Consider finding a real estate agent with experience in foreclosed homes. This person will be able to help you evaluate a potential home and counsel you on whether the asking price or auction price is worth it based on the home’s condition and other risks involved.
Find foreclosures for sale
Your real estate agent may be able to direct you to listings on homes in foreclosure. You can also try these places.
- Your county government — Your county’s website may list foreclosures or upcoming sales.
- The federal government — HomeSales.gov lists properties owned by the U.S. government for sale, typically after foreclosure. The U.S. Department of Housing and Urban Development also lists homes it has for sale online.
- Fannie Mae and Freddie Mac — The two government-sponsored entities that buy residential mortgages have their own sites where they list foreclosed homes for sale. Fannie Mae’s is HomePath.com, and Freddie Mac’s is HomeSteps.com.
- Real estate listings sites — Websites like Zillow and Redfin offer homebuyers the option to search for foreclosed properties.
- Auction sites — Sites like Auction.com compile foreclosure listings and property auctions in your area.
- Banks and lenders — Large lenders like Bank of America and Wells Fargo list available foreclosures on their own websites.
Get pre-approved for a mortgage
It can be valuable to get pre-approved for a mortgage, just as you would for a traditional sale. This process allows you to submit some financial information to a lender and see how large of a loan you might qualify for, and under what terms. You can do this with multiple lenders and compare interest rates to see where you might get the best deal.
Remember, though, a pre-approval isn’t a commitment to lend — it just gives you an idea of what you can expect. But having a pre-approval letter in hand can give you a leg up when it’s time to make an offer on a home.
Check out Credible to compare mortgage rates from multiple lenders at once.
When you’ve found a lender, speak with a loan officer about the process for buying a foreclosed home. Lenders may have a set process for handling financing for foreclosed properties.
Research the home you want to buy
With a foreclosure, it’s important to do even more due diligence on the home you’re interested in before deciding to buy it. If you’re buying a home at auction, you may not have the opportunity to evaluate the interior ahead of the sale — but you can at least drive by the property and see its condition from the outside. Also, look carefully atf comparable home prices in the area. This can give you an idea of what the home could be worth once it’s fixed up.
Make a competitive offer
Your real estate agent can help you determine a fair price. If you’re buying a home in pre-foreclosure or as a short sale, you may be able to negotiate with the lender. At auction, your bid will go up against those from other potential buyers. Since foreclosed homes often go for lower prices than homes sold the traditional way, there may be multiple offers on a desirable foreclosed property — especially if real estate investors get involved.
Get an appraisal and home inspection
Hire a licensed home inspector to investigate the property, if at all possible. This is especially important when buying a foreclosed home, as they can sometimes be in disrepair after sitting vacant. Keep in mind that bank-owned homes typically haven’t been maintained, and most foreclosed home sales will be as-is. You’ll be responsible for any repairs.
You’ll also want to conduct a title search to make sure there are no additional liens on the property that will complicate your ownership. A title search company will be able to determine if there are any outstanding debts and make sure the deed is accurate.
Buy your new home
If you’re buying a home at auction, you may be required to have the home purchase price available in cash at the time of sale. In most cases, you’ll be able to finance the property. Your loan officer will guide you through the process of applying for and closing on the loan.
Pros and cons of buying a foreclosed home
Buying a home in foreclosure has its benefits, but it also has risks.
Pros of buying a foreclosed home
- You may get a deal. Foreclosed homes often sell below market price. Auctions may enable you to get a deal, since you might be working with a lender that wants to off-load the property and recoup its losses as quickly as possible.
- You may build equity faster. If you buy a home below market value and make a few repairs to get it back in shape, your home may now be worth considerably more than you paid for it. This equity can help you down the line — even allowing you to borrow against that value through a home equity loan or home equity line of credit, or HELOC.
- You may have less competition. When buying a foreclosed home, the pool of buyers may be smaller than in a traditional sale. Some buyers will be scared away by the potential for repairs, and others won’t feel comfortable with the process.
Cons of buying a foreclosed home
- The home may be in disrepair. Foreclosed homes may have been vacant for an extended period of time and may need substantial repairs to make them habitable again. Most foreclosed home sales are “as-is,” meaning you’re responsible for all repairs.
- You may not be able to inspect the property. If you’re buying a home at auction, you may not have the opportunity to inspect the inside of the property before committing to buy it. This can be a risky move.
- The foreclosure may not go through. Just because you see a home listed as a foreclosure property for sale doesn’t mean you’ll actually be able to buy the property. The foreclosure process offers multiple opportunities for the homeowner to get caught up on their payments and stay in their home. You may have your heart set on a home only to find out that it won’t go up for sale after all.
What are my loan options for buying a foreclosed home?
If you’re buying a foreclosed home at auction, you may need to have the purchase price available in cash. But in most circumstances, you’ll be able to get a home loan to finance the property. Most loan types you’d use for a traditional transaction will be available to you.
- Traditional mortgage: These fixed-rate loans offer you a stable monthly payment that won’t change for the life of the loan. Many of these mortgages follow rules set by Fannie Mae and Freddie Mac. This includes a minimum credit score of 620 and a down payment as low as 3%.
- FHA loan: These loans are issued by private lenders but backed by the federal government. You can qualify for a mortgage with a credit score as low as 500 and a 10% down payment. If your credit score is 580 or above, you may qualify for a down payment as low as 3.5%.
- USDA loan: This government loan program allows low- to moderate-income families living in rural areas the chance to buy homes with no down payment.
- VA loan: Military service members and veterans may be eligible for a VA loan, a benefit from the U.S. Department of Veterans Affairs. VA loans generally don’t require a down payment.
- 203(k) rehab loan: If you’re buying a foreclosed home that needs repairs, the FHA also offers a rehabilitation loan program that may allow you to finance the purchase price of the home as well as the cost to fix it up.
Credible makes it easy to compare mortgage rates from multiple lenders.
Should I buy a foreclosed home?
Only you can decide if a foreclosed home is right for you. Evaluate your budget, financial situation, and risk tolerance before moving forward. If you have extra room in your budget and some home repair skills, buying a foreclosed home may get you a great deal or a home in a neighborhood you wouldn’t normally be able to afford. But if you don’t have any financial wiggle room, it might be wise to skip foreclosed properties when searching for a new home.
The good news is, there will likely be plenty of financing options if you decide to move forward with buying a foreclosed home. Consider hiring a real estate agent with experience in foreclosed home sales to make the process go more smoothly.
Buying a foreclosed home isn’t for everyone, and it requires some due diligence. But you may be able to score a great deal and turn the house into your dream home.
About the author: Andrew Dunn is an award-winning mortgage and finance writer with a decade of experience in covering personal finance. He’s written for LendingTree, where he was previously managing editor for mortgage content, Credit Karma, Business North Carolina magazine and the Charlotte Observer. His work has been recognized by the Society of American Business Editors and Writers, and the N.C. Press Association. Andrew holds a bachelor’s degree in journalism from the University of North Carolina at Chapel Hill, and a certificate in business journalism and a minor in Spanish. You can find him on Twitter or on LinkedIn.
