Buying a foreclosed home is probably one of the best financial decisions you can make as a first time home buyer (although it’s not without risk).
In fact, it’s one of the best ways to make a good return on your investment. That is because foreclosed homes usually have more value than a traditional purchase.
However, the process of buying a foreclosed home can be risky and is different than a traditional purchase.
Plus, it can be very competitive as other buyers (sometimes real estate investors with a lot of cash) are probably looking for the same opportunity.
So, if you’re thinking of buying a foreclosed home soon, do your due diligence and act fast. And use the following steps below as a guideline.
What is a foreclosure?
Before we learn how to buy a foreclosed home, we need to define what a foreclosure is.
Simply stated, a foreclosure is a property where the owner has defaulted on his or her loan payments. It can be other loan requirements, such as not having proper insurance coverage for the property. It can also be keeping the property in a bad condition.
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The lender (a bank, credit union, etc…) in the hope of getting some of their money back, takes legal possession of the property. The lender, in turn, will try to sell the house.
Foreclosed homes make buying a house a great opportunity for home buyers.
Why? The lender’s goal is to sell the foreclosed home as fast as possible. Holding on to a foreclosed, empty home costs the lender money.
So they are more concerned about selling it as quickly as possible rather than holding on to it for the highest price.
If you’re considering of buying a foreclosed home, follow these steps below.
Buying a foreclosed home in 10 Simple Steps:
If you’re a motivated buyer willing to buy a house in foreclosure, knowing these steps is important in order to buy a house at below market. It’s even more important if you’re buying a foreclosed home at auction.
Here are the 5 steps you need to take when considering buying a foreclosed home.
1. Get your finance in order
Remember you’re buying a foreclosed home from a bank that wants to get rid of the property as fast as they can. So time if of the essence.
Time is of the essence, especially if you’re buying the foreclosed home at an auction. Once your hand goes up, and you win the bid, be prepared to pay the down payment and sign the contract. Generally with buying a foreclosed home at an auction, there’s no cooling off period.
So organize your finance before you start looking.
That means knowing how much you can afford to borrow, making sure your credit score is in good shape, and having your down payment is ready, etc…
2. Secure a pre-approval letter from a lender.
Buying a regular house requires you to take out a mortgage loan to finance it (unless, of course, you have enough cash to buy the whole property).
Buying a foreclosed home is no different. The same concept applies.
Related: Apply for a Mortgage Loan Today
So before you start looking for a foreclosed home, make sure you can secure a mortgage. You can start doing that by getting pre-approved.
The process is not complicated, all you need is to find mortgage lenders. Then compile all necessary documents including your bank statements, pay stubs, or other forms of income.
Your credit score is one of the most important things, mortgage lenders look at to pre-approve you. So make sure your credit score is good.
Having a pre-approval letter can signal to sellers that you’re a serious buyer. It can also signal that you will be able to secure a loan.
3. Work with a real estate agent
A real estate agent will not only help you find current foreclosed homes listings, but can also inform you of those properties that will be listed soon.
This way, you are able to go through all of the foreclosed homes that are within your mortgage pre-approval range.
There are other reasons working with a real estate agent is important when buying a foreclosed home.
One is that, they may have experience helping other people finding foreclosed homes. Second, with that experience, they are able to tell you whether a foreclosed home will make a good buy or not.
4. Start your search: where to find foreclosed homes?
Finding a home in foreclosure can be very easy. Generally, your real estate agent can give you a list of them. You can easily find them listed on popular sites like Zillow, Redfin or Trulia.
Better yet, you can drive through any neighborhood, and you will likely see signs that say “bank owned”
Additional steps in buying a foreclosed home
If you are in a hurry to buying a foreclosed home, these three steps above should suffice. But if you want to make sure your home buying process goes as smoothly as possible with no real surprises later on, continue on the following steps.
5. Compare prices
Before buying a foreclosed home, it’s always a good idea to compare prices of recent sales of similar foreclosed properties.
Again, your real estate agent can help you with that as well.
6. Get the right home loan
The number of home loans available to you can be mind-boggling.
However, LendingTree’s online platform has over 1500 home loans and can match you up to 5 mortgage lenders so you can choose the best mortgage rate.
So you should always do your due diligence to make sure you find a mortgage specific to your needs.
Not all loans are made equal. Rates and fees can vary from one mortgage lender to another.
So don’t make the mistake at looking at one lender only.
Use a free comparison website such as LendingTree to compare home loans side by side.
7. Inspect the property
Once you find the home and make an offer, make sure you hire an inspector to do a thorough inspection to determine the condition of the property and the overall cost of any repairs and renovations the property might need.
So even if you’re likely going to save money by buying a foreclosed home at below market, don’t try to save money by foregoing a physical inspection on the property.
No matter what the circumstances, always do an inspection.
8. Find a good lawyer
A lawyer should do all the legal work involved in buying a foreclosed home.
They will do a title search to see if the property has any liens, etc.
A lawyer can also guide your through the contract negotiation process.
9. Consider repair costs
Foreclosed homes are offered “as is.” So, you should expect some damage done to the house. Perhaps the previous owner was upset about losing their home and did real damage to the property.
And if they did not have the money to make their mortgage payments, it’s safe to assume they did not have any money to maintain the house.
It’s a good idea to also consider repair or renovation costs when buying a foreclosed home.
10. Consider other costs
In addition to the down payment and repair costs, closing costs, there are other costs involved in buying a foreclosed home. They include moving costs, maintenance costs, etc..
So make sure you consider these costs when making your budget.
In conclusion, property in foreclosures are properties where previous owners have failed to meet their loan requirements and the lenders take legal possession of the property. Although they can be risky, they are usually a better value than a traditional purchase.
So, if you’re a potential home buyer willing to do the due diligence to find rare opportunities, you can be significantly rewarded.
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