Buying A Foreclosed Home In 5 Key Steps

Buying a foreclosed home can be an excellent opportunity. If you’re lucky, you can snag a beautiful home for an affordable price. But it also has some risks, so much so that some buyers wouldn’t even consider buying a foreclosed home.

While the process of buying a foreclosed home shares some similarities with any other home purchase, there are also some key differences that buyers must know about before they dive in.

What Is A Foreclosed Home?

A foreclosure is initiated when a homeowner misses payments on their mortgage. The lender legally takes possession of the home to sell it and recover the loan’s outstanding balance.

Mortgage lenders don’t foreclose on a home after a single missed payment. Federal law allows lenders to begin the foreclosure process once a homeowner has failed to make their payments for 120 days or more.

When a lender forecloses on a home, it wants to recover as much of its investment as possible. As a result, the lender sells the foreclosed home – often for less than its worth.

How To Buy A Foreclosed Home In 5 Steps

In some ways, the process of buying a foreclosed home looks quite similar to buying any other home. But there are some differences to understand.

Step 1: Get Preapproved

Getting a preapproval is a crucial first step to buying a house, and the same will likely go for buying a foreclosed property. Unless you plan to buy your home at a foreclosure auction or are interested in a property that stipulates a cash payment, you’ll most likely still need to get a mortgage to help finance your purchase.

You’ll need to acquire a preapproval letter when you make your offer, just like you would with a regular home purchase. A preapproval letter lets a seller know that you are serious about purchasing a property and that you have the means to do so. Plus, it can help you plan and adjust your budget expectations by allowing you to see just how much money you can borrow and have to work with.

Step 2: Hire A Real Estate Agent

It can be beneficial to work with a real estate agent who knows how the foreclosed home buying process works. They can help you steer clear of any issues and help educate you about different things to consider when buying a foreclosed home.

For example, if you’re buying a foreclosed home at an auction, you’ll need to do additional research to see what liens are outstanding on the property. Your agent can help you review the liens as well as any laws regarding foreclosed homes in your state.

Step 3: Research Different Ways To Buy A Foreclosed House

Working with a real estate agent is typically the best way to navigate the different types of foreclosures. However, it’s still a good idea to know your options when buying a home through this process.

Preforeclosures

Buying a preforeclosure, means you're buying from the homeowner rather than the bank. During the preforeclosure process, the bank has notified the homeowners of its intention to take legal action but hasn’t actually completed the foreclosure process. Instead, the homeowner is selling the home as a way to catch up on their payments and avoid the foreclosure process altogether.

Short Sales

Like a preforeclosure, a short sale involves buying a property directly from the homeowner before the foreclosure process has been completed. But in this case, the homeowner sells the home for less than they owe on the mortgage with the approval of their lender.

For example, someone might owe $250,000 on their mortgage loan but can only sell the home for $225,000. They would have to find another way to pay the remaining $25,000.

Auctions

Buying a house at a foreclosure auction is the fastest route to buying a home because you avoid negotiations with a bank or seller.

Each foreclosure auction usually has its own rules that properly adhere to your state and municipality’s laws. Be sure to do your research beforehand or strategize with your real estate agent.

Here are a few things to keep in mind as you prepare to buy a foreclosed home at an auction:

• Check the title: Because an auction is different from the traditional home buying process, there’s no title. Instead, it’s on you to check the title for yourself.
• Prepare to make a cash deposit: In most cases, auctions require a cash deposit, meaning you’ll need a significant amount of money on hand.
• The home may have a right of redemption: Some states have what’s known as the right of redemption, where the previous owners have the right to pay what they owe the bank and buy back their home, even if it’s already been listed for auction.
• Prepare for home repairs: Properties sold at auctions are sold as is and may be considered distressed properties. You also won’t have the opportunity to get an inspection so you may want to anticipate repairs.

Buy From A Bank Or Lender

Foreclosed homes owned by a bank or lender, also known as real estate owned (REO) properties, will require the use of a real estate agent as most lenders won’t sell a bank-owned property directly to the individual home buyer.

Similar to auction-sold properties, REO properties are usually sold as is, though they come with a bit more security and peace of mind in the form of:

• A title that has been cleared of any liens and outstanding taxes
• The ability to view the home before purchasing
• The ability to get a home inspection should you want one

Step 4: Find Foreclosure Listings

Searching for a foreclosed home has become more accessible thanks to the internet.

To browse foreclosed listings, here’s a list of websites to help you get started:

• HUD: The Department of Housing and Urban Development is an official government website, which lists foreclosed properties. Each listing should include the contact information for a real estate agent who you can contact should a property catch your eye.
• Fannie Mae: Here you can easily search for homes in your area by inputting an address, city, ZIP code or multiple listing service (MLS) number – just be sure to check off “HomePath Listing” in your search filter to find the foreclosure properties.
• Freddie Mac: Freddie Mac’s HomeSteps^® is another user-friendly way to browse listings in your local area.
• Rocket Homes^SM: The Rocket Homes directory for home listings is another way to browse local properties and this resource can even specify what kind of foreclosure you’re dealing with.

Step 5: Make An Offer

Once you find a home that you like and is within your budget, it’s time to make an offer. While it’s true that you can often get a good deal on a foreclosed home, coming in with a lowball offer may end with yours being rejected.

An experienced real estate agent can help you understand what makes a competitive offer for the area and the market so that you can still score a great deal without being turned away.

You may also want to consider making a contingent offer in order to have the house inspected before the sale is final. That way, if anything pops up that’s concerning, you have the option to rescind your offer or further negotiate the purchase price.

Financing Options For Foreclosed Homes

Your financing options for buying a foreclosed home may depend on how you’re buying it. It’s often more difficult to get a mortgage from a private lender for a foreclosed home. For that reason, consider a special loan program that may be more flexible.

• FHA 203(k) loan: A 203(k) loan is a loan that’s offered by the federal government and is designed to cover both the purchase and rehabilitation of a home. This type of loan might be a good option if you’re planning to renovate your foreclosed home. Rocket Mortgage^® does not offer FHA 203(k) loans at this time.
• Fannie Mae HomeReady loan: A HomeReady mortgage is a home loan for low-income home buyers who have limited cash for a down payment. You can use this type of mortgage to buy a home through Fannie Mae’s HomePath program, which is where it sells homes acquired through foreclosure.
• Freddie Mac CHOICERenovation or CHOICEReno Express: These two mortgage products from Freddie Mac are similar to the Fannie Mae HomeReady loan and can be used to purchase homes through Freddie Mac’s HomeSteps program where it sells foreclosed homes. Rocket Mortgage does not currently offer CHOICERenovation or CHOICEReno Express at this time.
• Conventional mortgage: If you’re lucky enough to find a foreclosed home that’s in great shape and you’re able to get an inspection and appraisal, a conventional mortgage might be an option for you.

No matter what loan option you choose, make sure to get preapproved ahead of time. This ensures you’re able to finance your foreclosure purchase, as well as to find out how much you can borrow and what interest rate you may be approved for.

Pros And Cons Of Buying A Foreclosed Home

Before you decide to buy a foreclosed home, it’s important to understand the benefits and drawbacks.

Pros

Here are some of the benefits of buying a foreclosed home rather than a traditional home on the market:

• Motivated sellers: In many cases, sellers of a foreclosed home have no choice but to sell. This is the case whether the seller is a homeowner in preforeclosure or a lender who has recently foreclosed on the property and wants to recoup its losses.
• Often lower prices: Foreclosed homes often sell for lower than the market value because the seller wants to get rid of them quickly.
• Build equity faster: Because these houses sell for less than their market value, you’re able to build equity more quickly. This equity could make it easier to get a loan or could allow you to borrow against your home in the future.

Cons

While buying a foreclosed property has some benefits, there are also some disadvantages compared to buying a traditional home on the market.

• As-is condition: Foreclosed homes are usually sold as is. Even if your home inspection finds issues with the home, the seller (whether it’s the bank or the homeowner) won’t fix them before the sale.
• More competition: You might find that there’s more competition when buying a foreclosed home. While not everyone is comfortable buying a foreclosed home, many go that route because of how affordably priced the homes are.
• Complicated negotiations: The negotiation process can be complicated when buying a foreclosed home because there may not be much wiggle room on the price. You also may not be able to get any seller concessions like you might with a traditional home purchase.

Is Buying A House In Foreclosure Right For You?

Because a foreclosed home may have fallen into a state of disrepair, it may be more suitable for buyers who have enough money to cover the repairs. If you want to renovate or flip a house, foreclosures can be a great investment that supplies instant equity.

On the other hand, there may be better choices than buying a foreclosed home for someone hoping to find a move-in ready home. Unless you’re prepared to put significant work into the house, a foreclosure probably isn’t right for you.

FAQs On Buying A Foreclosed Home

Are you considering buying a foreclosed home? Here are a few additional things you’ll want to know.

Is buying a foreclosed home with bad credit possible?

It’s possible to buy a home with bad credit, and foreclosed homes are no exception. If you’re purchasing a foreclosed home in cash, you won’t need to qualify for a loan with a lender, which is when your credit score would normally be checked.

If you work with a hard money lender to buy the property, you’re offering a piece of the property as collateral. In that case, you may not need a good credit score to purchase the property.

Can I buy a foreclosed home with an FHA loan?

If you’d like to use an FHA loan to buy a foreclosed home, you can do so as long as the home meets the FHA requirements. Using an FHA loan to purchase a property may also be an option if issues with credit disqualify you from a traditional mortgage.

Are foreclosure homes always sold at below-market prices?

Foreclosed homes are often sold at below-market prices, but that’s not a hard-and-fast rule. Depending on where you live and the current housing market, high demand could drive up the price of foreclosed homes.

Are foreclosed homes a good investment?

Whether a foreclosed home is a good investment for you depends on many factors. Because these homes are often priced below market value, you can quickly build equity. And if you’re planning to invest in real estate, a foreclosed home can be an affordable way to buy and flip a property or fix it up to rent out.

However, it’s important to run the numbers on the purchase and renovation before deciding whether a specific foreclosed home is worth it for you.

The Bottom Line: Consider Whether Buying A Foreclosure Is A Smart Investment For Your Financial Goals

Buying a foreclosed home can be a good option in the right situation. While there are downsides to purchasing a foreclosed home, like the length of time required to complete the purchase and the possible cost of maintenance issues, there are pros as well. Namely, you might be able to buy a home for less money than you would if buying through a traditional route.

If you think that buying a foreclosed home is the right solution for you on your home buying journey, consider starting the application process with Rocket Mortgage today.

Participation in the Verified Approval program is based on an underwriter’s comprehensive analysis of your credit, income, employment status, assets and debt. If new information materially changes the underwriting decision resulting in a denial of your credit request, if the loan fails to close for a reason outside of Rocket Mortgage’s control, including but not limited to satisfactory insurance, appraisal and title report/search, or if you no longer want to proceed with the loan, your participation in the program will be discontinued. If your eligibility in the program does not change and your mortgage loan does not close due to a Rocket Mortgage error, you will receive the $1,000. This offer does not apply to new purchase loans submitted to Rocket Mortgage through a mortgage broker. Rocket Mortgage reserves the right to cancel this offer at any time. Acceptance of this offer constitutes the acceptance of these terms and conditions, which are subject to change at the sole discretion of Rocket Mortgage. Additional conditions or exclusions may apply.