People are faced with a lot of challenges and trials and this could result in an inability to pay up house rent or mortgage fees. Such homes are then foreclosed by the lender or owners.
Although it’s a sorry situation, it also serves as an opportunity for buyers and real estate investors to purchase such foreclosed homes at a very subsidized price.
Therefore, this study explains what Foreclosed homes are and how it works. It also gives a detailed step-by-step guide on how to buy foreclosed homes.
What Is A Foreclosed Home?
A foreclosed home is a home seized by the lender when the homeowner(borrower) fails to make their mortgage payment.
Properties or as in our case homes are foreclosed as a result of a lender attempting to recover the amount owed on a defaulted loan by taking ownership of the mortgaged property and selling it.
Typically, this default is triggered when a borrower misses a specific number of monthly payments but it can also happen when the borrower fails to meet up other terms in the mortgage document.
This legal process is also known as Foreclosure.
Foreclosed On Homes: How It Works
The foreclosure process on a home is a bank or other secured creditor selling or repossessing a parcel of real property after the owner has failed to comply with an agreement between the lender and borrower called a ‘mortgage or ‘ deed of trust’.
Typically, the violation or non-compliance of the mortgage is a ‘default in payment’ of a promissory note secured by a ‘lien’ on the property.
Every mortgage contract has a lien on your property.
A lien is a form of security interest granted over an item of property to secure the payment of a debt. That is, it is a legal right that allows your lender to take control of your house if you stop making your mortgage payments.
ForeClosed Homes: Pre-Foreclosure Stage
When a payment default occurs ( that is the homeowner has missed at least one payment and then several months of payments) a homeowner’s entire mortgage can default.
This circumstance triggers the first stage of foreclosure, which is known as the Pre-Foreclosure – when a mortgaged home is in this stage, it means the borrowers(homeowners) have been notified by the mortgage lender that they are in default.
A notice of default is usually sent by the lender after 90 days of missed payments, though foreclosure referral timelines vary as it is based on the contract agreement as well as the policies of the lender and investor in the mortgage.
A homeowner is then often given time to work out a new payment plan with the lender but if it doesn’t hold, then the lender can sell the property and keep the proceeds to pay off its mortgage and any legal costs and it’s typically said that ‘the lender has foreclosed its mortgage’.
If the promissory note was made with a recourse clause and if the sale does not bring enough to pay the existing balance of principal and fees, whether the mortgagee (lender) can file a claim for a ‘deficiency judgment’.
How To Buy Foreclosed Homes: Step-by-step Guide
The process of buying a foreclosed home is not too different from the traditional way of buying a home, only more research should be done. Here are the steps you need to take to successfully purchase a foreclosed home:
#1. Get A Preapproval Mortgage Letter
Before you start looking to buy a foreclosed home at foreclosed auctions or from any lender, you first make sure you can get a mortgage except of course you’re buying with cash but if you’re planning on using a loan, you’ll want to be certified qualified before you start looking.
This qualification is done through gaining a pre-approval. Pre-approval will give you your mortgage rates and terms before you put an offer in.
A mortgage preapproval lets you know how much you can get in a home loan and how much of a mortgage, you can be approved of. This is done through the running of your credit and verification of your income and debt by a lender.
So, getting one of those letters when making an offer at hand will help keep you in line with the budget and it also makes you an attractive buyer.
#2. Research And Understand The Various Methods In Purchasing Foreclosed Homes
Making due research is essential as with any major purchase. This is because human needs vary from person to person. Here are the most common paths to consider in the purchase;
- from the Homeowner
- at auction
- From Lenders/Mortgagees
#1. Purchase from the Homeowner
when there’s a potential threat of foreclosure, the homeowner with the permission of the lender can sell the home for less than what they owe on their mortgage (short sale). This ensures that they do not fall behind on their monthly payment.
#2. Purchase at auction
Foreclosed homes can be purchased at a real estate auction. These auctions are mostly run by local law enforcement and designed to repay the lender quickly for the defaulted loan.
Homebuyers can buy a home quickly at these auctions.
#3. Purchase from Lenders/Mortgagees
In this situation, you skip working with the homeowner but rather with the lenders which could be a bank or a government agency.
The lender here clears the title and evicts the homeowner before foreclosing the home and putting it up for sale.
When the property fails to sell at auction, it reverts to the bank; that is, they become real estate-owned (REO) properties and are often managed by the institution’s REO department.
Some homes are purchased with loans guaranteed by the Federal Government’s Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA), these homes are typically taken ownership of by the Government after the owner defaults on mortgage loans insured by the federal government, these properties are then handled and sold by brokers working for that federal agency.
Worthy of note is that most lenders won’t sell directly to an individual, you’ll need to talk to an experienced real estate agent to view available properties. These homes are usually sold “as-is”.
However, you’ll usually get the opportunity to view the home and order an inspection before you close.
#3. Determine The Cost Of Home You Can Afford
Making a budget and staying in line is essential because even as low a price as a foreclosed home could be, they are not free.
So, a crafted household budget listing your DTI (debt-to-income) ratio is essential to determine how much mortgage you can afford each month comfortably.
Also, buying a foreclosure at a price tag that’s at the very top of your budget could be risky as the property may require expensive repairs.
#4. Work With An Experienced Foreclosure Specialist
Working with a realtor or foreclosure specialist who knows the local market and has experience navigating the process will cushion some setbacks, and facilitate the purchase by helping you ascertain when a foreclosed home is at a bargain price and when it’s worth the risk.
Also, an expert will help you understand the state’s set of laws and regulations concerning foreclosed homes.
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#5. Make A Competitive Purchase Offer
Indeed, foreclosed homes often sell for less than traditional homes and one might be tempted to make a low offer which may not be productive.
It’s therefore, important to work with your real estate agent to create a competitive offer-an offer that is not too far below market value- otherwise, it might be rejected by the sellers (whether they are a federal government body, a bank, or a secured creditor) especially if there are multiple bidders.
#6. Get A Home Appraisal And Inspection
An appraisal is a letter requirement by your lender before they offer home loans because they need to know that they aren’t lending you too much money and it also lets you know how much a property is worth.
A Home Inspection on the other hand is a more in-depth look at the property. Keep in mind that foreclosures are mostly sold “as-is”. This means no one on the selling side is responsible for any repairs. Every needed repair encountered is your responsibility.
Working with an experienced home inspector to look at and uncover every repair problem. These problemscan range from minute leakages to the strength of the foundation. Besides, getting to know how long the property has been unoccupied and if the previous homeowner performed routine maintenance is very important.
Usually, banks and government agencies allow for an inspection contingency as part of the offer but this is done after your offer has been accepted but before the sale closes.
This is one of the drawbacks of purchasing a home at auctions.
#7. Purchase Your New Home
Going through the inspector’s report on the findings of the property and the appraisal meticulously will then help inform your decision if the home in question is right for you and if you’re okay with purchasing a home “as-is”. If positive, then you contact your mortgage lender and real estate agent to help you close the deal.
How To Buy Foreclosed Homes From The Bank
You can also buy a foreclosed home directly from the bank, this happens if the property does not sell at auction, it reverts to the bank which they will then attempt to sell to recover what’s owed.
Many potential homebuyers overlook bank-owned properties. Some might feel intimidated because they often require more renovations and a different type of negotiation than other options on the market.
However, for buyers who take the time to understand the REO process, these homes can be a significant opportunity. This is because some of these properties come at a significant discount. Hence, if you’re willing to work it through, you might have set yourself up for a great deal.
You might come across the term “REO” while searching for home listings. This stands for “Real Estate Owned” and denotes a foreclosed property whose ownership has been transferred to the bank.
At this stage, the bank will clear the liens on the property and evict the previous homeowner. Then they put it on the market through a real estate agent.
You can check here for Real ESTATE ATTORNEY: Guide on Hiring Estate Lawyers
Steps For Property To Become REO
For a property to become an REO owned, it must go through these general steps:
- Loan Default
- Notice of default
- Foreclosure
- Auction
- REO status
a) Loan Default: the homeowner fails to make their mortgage payment for a certain length of time.
b) Notice of default: the lender issues a notice of default. However, if the homeowner still does not comply, a notice of sale.
b) Foreclosure: the lender forecloses the property through legal proceedings against the borrower
c) Auction: the property is then offered up for sale to the public at a foreclosure auction. However, If it scales through, the bank or lender recoups some of the outstanding loan balance interest and fees from the sale.
d) REO status: if the home fails to sell in the auction, possession typically reverts to the bank. Hence, it becomes a real estate-owned (REO) property.
Processes Involved In Buying Foreclosed Homes
For potential buyers looking to buy a foreclosed home, especially one purchasing with a VA (Verified Approval) loan, this is the stage of foreclosure they will buy.
And though the process of purchasing an REO home is similar to the standard home buying process. However, there are a few key exceptions to keep in mind:
- browse available REO properties through bank and lender listings, multiple listing services, real estate agents, and online services.
- Find a lender and discuss your financing options such as cash or a pre-approval from the lender.
- Find a real estate buyer’s agent, he will help navigate the home buying process.
- narrow down your list of REO properties, factors like listing price, significant repairs, location, neighborhood, lender-specific contingencies or requirements, etc should be considered.
- get an appraisal on the ideal property. This will help you know the true value compared to the asking price.
- Make an offer through your agent also keeping in mind the inspection process.
- Has the property been inspected? Add the cost of repairs to the asking price. Thus, you have a better idea of the full cost of the property.
- negotiate details such as purchase addendum etc with the aid of your agent.
- Finalize your loan, and make sure the title has been cleared by the bank.
- close the deal once all the paperwork is in place, you’ve wired in your down payment and your loan funds are in place then the deal is set.
Conclusion
A foreclosed home is owned by a bank or a lender. Lenders foreclose on a home when the homeowner stops making their regular monthly mortgage payments. This means that they take over ownership of that property.
Bank or mortgage lenders then sell these properties often at lower prices or with smaller down payments. Besides, they could be purchased at auctions, from the lenders, etc.
If you’ve dreamt of having your own home and you’re low on budget, you might consider a foreclosed home. Foreclosures may have their complexities around financing yet there are financing options that ultimately depend on your financial situation and what stage of foreclosure the property is in.
FAQs On How To Buy Foreclosed homes
What Is A Foreclosed Home?
A foreclosed home is a home seized by the lender when the homeowner(borrower) fails to make their mortgage payment.
How does home foreclosure works?
The foreclosure process on a home is a bank or other secured creditor selling or repossessing a parcel of real property after the owner has failed to comply with an agreement between the lender and borrower called a ‘mortgage or ‘ deed of trust’.
What are the Steps involved in buying foreclosed homes?
- Get A Preapproval Mortgage Letter
- Research
- Determine The Cost Of Home You Can afford
- Work With An Experienced Foreclosure Specialist
- Make A Competitive Purchase Offer
- Get A Home Appraisal And Inspection
- Purchase Your New Home
References
- nextadvisor.com – how to buy a foreclosed home
- Rocketmortgage.com – Buying A Foreclosed Home
- Investopedia.com – buying a foreclosed home
- Quickenloans.com
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