How To Buy A Foreclosed Home: A Guide

If you’re looking to save money on buying a house, you may be thinking about buying a foreclosed home. Going this route could save you a significant amount of money. But before doing so, you should be fully aware of how the foreclosure process works and the obstacles you might encounter.

Here, we’ll take a closer look at how to buy a foreclosed home and what to keep in mind as you shop for foreclosed properties.

How To Buy A Foreclosed Home

Before buying a foreclosed home, it’s a good idea to review the process. Below, you’ll find a number of hints, tips, and best practices to keep in mind when it comes to thinking about how to buy a foreclosed home.

1. Start Your Mortgage Approval

In most home purchases, to save time and expedite your home purchase, you’ll want to start the mortgage preapproval process early on in your home buying efforts. Doing so not only helps speed up your home loan process, but also helps establish your seriousness as a buyer and gives you a better sense of how much home that you can afford.

However, with foreclosed homes, a more likely situation would include delayed financing, which essentially requires you to pay cash upfront, then finance a loan that may be “counted” as a purchase later on.

Pursuing delayed financing may allow you to make a cash offer on a foreclosed home then immediately take on a mortgage and get most of your money back. Discuss your delayed financing options with a lender or the entity holding the foreclosed home to determine what would work best in your situation.

2. Consider Working With A REALTOR^®

Working with a REALTOR® or real estate agent can make a world of difference when you’re trying to buy a foreclosed home. Seasoned real estate professionals can offer many benefits, such as:

• Familiarity with an area's real estate market
• Professional relationship with banks
• Ability to help navigate any challenges of buying a foreclosed home
• Knowledge of local laws and regulations on foreclosure purchases
• Access to listings and other resources
• Offer guidance on whether or not a foreclosed property aligns with your needs and goals 

3. Look For Foreclosed Properties

It’ll be important to show patience when looking for foreclosed properties, as the search can be considerably difficult. Consider some of the following resources as a starting point.

• Government-owned listings: The Department of Housing and Urban Development lists the foreclosed homes that it owns on its websites and through local real estate agents.
• County offices: Information about foreclosed homes is filed with county offices, making it a public record and therefore data that is accessible to anyone.
• Auction websites: These websites can help you find and provide information on foreclosure properties that are up for auction in your area.
• Local bank websites: Bank websites may list their owned foreclosed properties online.
• State MLS real estate listing websites: The multiple listing service (MLS) is a network of local databases that contains information about properties on the market. Only real estate professionals can access this information so you may consider hiring one to help you.
• Touring neighborhoods of interest: You can additionally tour the neighborhoods where you’d like to buy and check for real estate signs that may be marked “Foreclosure” or “Bank Repo” with an agent's name on it.

4. Make An Offer

Making an offer on a foreclosed home can be slightly different than buying a conventional property. You and your agent will be working directly with a bank, investor or mortgage lender to make your offer.

5. Prepare To Buy As Is

If you’re looking at making an offer on a foreclosed home, you should be prepared to buy the property as is – meaning, in its current state of existence, even if that means significant repairs, maintenance and upkeep are necessary. Bearing this in mind, it’s particularly important to hire a certified home inspector and get a home inspection done on the property before moving forward with the purchase. Should you elect not to do so or you aren’t permitted to, you might be facing more costs in repairs than anticipated – or even serious issues (like structural or electrical concerns) that may previously have gone unnoticed. You may be able to ask the bank to inspect the property beforehand, though in some cases it may not happen, considering that there may be other buyers who are willing to forego this step instead.

Types Of Foreclosed Properties

There are several ways you can buy a foreclosed home depending on the type of foreclosure being levied on the property.

Preforeclosure

A preforeclosure can happen when the homeowner (who still owns and remains in possession of a property) knows that foreclosure may soon be forthcoming. A preforeclosure effectively provides a way for a homeowner to sell their property before it is foreclosed on and the bank or mortgage company is not involved if the sale of the property will pay off the mortgage.

Short Sale

A short sale occurs when a homeowner is approved to sell their home for less than the total balance that is still owed on the mortgage, then pays the proceeds of this sale to the lender. In essence, when foreclosure is looming, it provides a way for lenders to work with real estate agents to review offers and accept, counter or reject those offers in alignment with investor requirements.

Auction

Under a home auction scenario, buyers will be given the chance to purchase a foreclosed property as is in cash. This effectively means that they could be buying a property that has liens against it or other expenses that need to be paid out.

Bearing this in mind, you’ll want to keep an eye out for potential risks. For example, it’s important here to note pressing repairs needed and any liens placed on the property. Auctioned homes also might not get an appraisal done. If allowed, you’ll want to do a walk-through and possibly arrange for a home inspection to uncover any existing problems.

Government-Owned Properties

Government-owned properties are properties that have already been foreclosed on, but instead of an individual financial lender, you can instead expect to deal with government-backed or -approved programs. By way of example, this may mean having to work with the Department of Veterans Affairs (VA), Federal Housing Administration (FHA), or government-sponsored entities (GSEs) like Fannie Mae Homepath. Government-backed loan programs may offer financing options, but the property will need to meet their minimum standards and requirements for approval.

Bank-Owned Properties

If you’re considering buying a bank-owned foreclosure home, you’ll have to deal directly with the mortgage company or bank that owns the residence. Some of these financial institutions won’t finance foreclosed properties, however. Alternately, they may provide property financing, but will likely require a large down payment because it’s a risky investment. Noting this, you’ll want to shop around to see what your loan options are for real estate-owned (REO) properties.

Why Are Foreclosed Homes Less Expensive?

Foreclosed homes are usually cheaper because lenders are trying to recover the outstanding balances on their defaulted mortgages. As a result, foreclosures may list below market value. However, foreclosures can come in various stages of disrepair, so buyers may need to invest a lot of money, time and energy into making a property livable or profitable.

Foreclosed homes can be affordable for the following reasons:

• Seller time constraints: If a seller’s home is in the preforeclosure or short sale stage, they have limited time to make the sale before they lose possession of the home. This unfortunate situation benefits buyers, as they could potentially buy the home for less than it’s worth.
• Idle home inventory: Banks and auctioneers want to sell foreclosed properties because by doing so, they’re able to recoup a portion of their losses and get a new homeowner into the home. Selling these vacant homes at a discounted price can attract more buyers.
• Significant discounts: In most cases, a foreclosed home is sold “as is,” or in its current condition, which will usually mean having to spend money on repairs, maintenance and upkeep. For this reason, the purchase price for a foreclosed property may be significantly discounted.

Pros And Cons Of Buying A Foreclosed Home

Before deciding to buy a foreclosed home, it’s important to weigh the pros and cons. Let’s consider some of them.

Pros Of Buying A Foreclosed Property

You can reap many potential benefits from investing in a foreclosed home, some of which include:

• Lower purchase price
• Building equity faster
• Potential rental property income stream
• Opportunity to secure fixer-uppers
• The chance to upgrade the home to your liking

Cons Of Purchasing A Foreclosed Property

At the same time, buying a foreclosure home also comes with several prospective downsides, for instance:

• Tough competition among buyers
• Potential mortgage liens
• Potential hidden costs
• Property may need repairs and upkeep
• Buying the home “as is”
• Inspections and appraisals aren’t always included

Buying Foreclosures: FAQs

Here are answers to some frequently asked questions about how to buy a foreclosure home.

How long is the process to buy a foreclosed home?

The traditional home buying process can already be quite lengthy, usually taking anywhere from 3 months to a year. Depending on your unique situation and the current market where you live, the foreclosure process from start to finish can take significantly longer – sometimes many years.

Can you buy a foreclosure with a VA loan?

Yes, it is possible to buy a foreclosed home with a Department of Veterans Affairs (VA) loan. However, your property must meet the VA’s minimum property requirements to qualify for a loan, which can complicate and lengthen the foreclosure process.

Can you buy a foreclosure with an FHA loan?

Yes, you can buy a foreclosure with a Federal Housing Administration (FHA) loan, so long as the home is in livable condition and can pass FHA appraisal requirements. While this financing option can be appealing, buying a foreclosed home with an FHA loan can make it harder to compete with all-cash buyers.

The Bottom Line: Buying A Foreclosed Home Can Be Worthwhile

Buying a foreclosed home can save you money and allow you to purchase a property at a discounted price. Admittedly, this can be a difficult and unpredictable process with no guarantees. Keeping this in mind, it’s critical to do your research when considering buying foreclosed homes, and shopping around for potential properties. By working with a top-notch REALTOR®, you can make sure that buying a foreclosure is the right decision for you.  

The first step in buying a foreclosed home is getting approved for a mortgage. You can start a mortgage application with the Home Loan Experts at Rocket Mortgage® today!