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What You Need to Know
- Homebuyers who are interested in buying a foreclosure home will first want to familiarize themselves with the different types of foreclosure sales, make a budget, and hire a real estate agent who has experience with foreclosures.
- Next, buyers can search for foreclosure homes for sale in their area.
- Before making an offer, buyers will want to get preapproved for a mortgage.
- Once the buyer’s offer has been accepted, they’ll need to get an appraisal (and ideally a home inspection) before they can purchase the home.
With a foreclosure, real estate owned by individual homeowners is recycled back into the housing market. Foreclosure is a legal process that happens when a homeowner fails to make their mortgage payments. When homeowners fall behind on these payments for more than 120 days, it’s common for the mortgage lender to take possession of the home, reselling it to avoid major financial losses.
Because the main goal is for the lender to recover as much of its investment as possible, foreclosed homes are often sold for less than their market value. This makes these properties attractive to both first-time and experienced homebuyers. However, the process of finding, vetting, and purchasing a foreclosed property can be complicated. Therefore, prospective buyers will need to be prepared to weigh all the pros and cons to decide if buying a foreclosed home is right for them. To set themselves up for success, buyers can begin by reviewing this step-by-step guide on how to buy a foreclosure home.
Before You Begin…
It’s easy to understand the appeal of buying a house in foreclosure. But before they begin browsing foreclosure listings, homebuyers need to take the time to understand the different benefits and drawbacks that come with purchasing a foreclosed property.
It’s true that lucky buyers may be able to find a quality home at an affordable price by going with a foreclosure, minimizing the up-front costs of homeownership. However, it’s also important to note that due to their lower cost, foreclosed homes often come with heavy competition in the market. For this reason, these properties are typically sold in their current condition, so depending on the state of the home, buyers may need to be prepared to pay for additional repairs and renovations. Still, foreclosure properties can be a great investment for the right buyer at the right time, although it’s crucial to take the proper steps to ensure the property is worth their time, energy, and hard-earned savings.
STEP 1: Research the different types of foreclosure sales.
Before they can buy a foreclosure home, buyers will need to understand the different types of foreclosure sales.
| Type of Foreclosure | Description |
| Preforeclosure | The homeowner sells the home at market value before the lender can repossess it. |
| Short sale | The homeowner sells the home below market value before the lender can repossess it. |
| Foreclosed home auction | The lender repossesses the home and sells it at a property auction, usually for less than market value. |
When homeowners are notified of their lender’s plan to take possession of the home, some may decide to sell the property before legal action can be taken. These sales are called preforeclosures. When buying a preforeclosure, buyers may find that the process is similar to purchasing any other home: their real estate agent works directly with the homeowner’s agent to reach a deal.
Short sales are another option. Much like preforeclosures, short sales allow homebuyers to purchase properties directly from the homeowner before the foreclosure process has run its course. With a short sale, these preforeclosure properties are typically sold below their market value, allowing buyers to potentially get a great deal on their new home. However, it’s worth noting that despite the name, short sales often take longer than traditional home sales, so buyers will need to be patient if they choose to pursue this option.
Foreclosed home auctions can be a faster way for buyers to find and purchase foreclosure properties. When homeowners default on their mortgage or fail to pay property taxes, their mortgage lender may decide to sell their home at a housing auction. Before attending one of these auctions, buyers will need to do some research to understand the rules and regulations that may apply, which can vary dramatically between states.
STEP 2: Research your mortgage options
Before a homebuyer starts the process of searching for a foreclosure home to purchase, they’ll need to determine their financing options. When it comes to foreclosure homes, there are several choices available:
- Conventional mortgage. Buyers with good credit and a sizable down payment may want to choose a conventional mortgage to help buy a foreclosed home. Many of the best mortgage lenders (such as PNC or Caliber Home Loans) offer multiple types of home loans with varying mortgage rates.
- Department of Veterans Affairs (VA) mortgage. Qualified veterans and their spouses may want to choose from among the best VA lenders to finance their home purchase. However, the VA won’t approve a loan for a home in a state of disrepair, so this might not be an option for some foreclosure homes. VA loans don’t require borrowers to have a down payment.
- U.S. Department of Agriculture (USDA) mortgage. Low-income buyers may want to look into the best USDA lenders to help finance their foreclosure home purchase. To qualify, the home must be located in a qualified rural area. USDA loans don’t require borrowers to have a down payment.
- Federal Housing Administration (FHA) mortgage. First-time buyers looking to save on their up-front costs may decide to go with one of the best FHA lenders. To qualify, the home must pass an FHA appraisal and be in a livable condition. FHA loans come with low down payment requirements.
STEP 3: Get a mortgage preapproval letter.
The next step is for the homebuyer to get preapproved for a home loan. A mortgage preapproval letter will provide several important pieces of information, including the amount of financing the lender is willing to supply and a rough estimate of the price the buyer will need to pay to receive that financing. Plus, offers made by preapproved buyers are typically more appealing, so borrowers with a mortgage preapproval in hand may have an easier time getting their offer accepted.
To get preapproved for a home loan, prospective borrowers will need to know the type of loan they want to pursue and the lender they want to work with. Whichever option they choose, taking the time to get preapproved for a loan can help buyers streamline the rest of the home-buying process.
STEP 4: Come up with a budget.
Once a prospective buyer has taken the time to understand the different options for buying a foreclosure home, it’s time to set a budget. Though foreclosures can help buyers save on a home purchase, these homes still come with several important cost considerations.
To set a budget for their home purchase, potential buyers will need to consider several factors, including the amount of cash they are willing to pay up front and how a mortgage payment might fit into their monthly budget. But with foreclosures, homebuyers will also need to consider other expenses that could arise with these types of properties.
“Setting a budget involves more than just the purchase price,” explains Brett Johnson, a licensed Colorado real estate agent and owner of New Era Home Buyers in Englewood, Colorado. “Homeowners should also account for expenses like repairs, renovations, inspections, and possible legal fees. It is advisable to secure preapproval for a mortgage or private loan to understand your borrowing capacity and collaborate with a real estate agent who specializes in foreclosures to get an estimate of additional expenses.”
STEP 5: Hire a real estate agent who specializes in foreclosures.
Many homebuyers are apprehensive about buying foreclosed homes simply because the process is unfamiliar to them. The solution? Hiring an expert to guide the way. Working with an experienced real estate agent, especially one who specializes in helping clients buy foreclosed homes, can help first-time buyers minimize uncertainty and navigate the process with ease.
Partnering with a real estate agent will make it easier for buyers to understand the legal, financial, and functional implications of buying foreclosures. For example, many states have their own laws surrounding foreclosed homes, which prospective buyers may or may not have knowledge of. Additionally, buyers looking to purchase a foreclosed home at a housing auction will need to ensure there are no outstanding liens on the property. An experienced real estate agent will be able to assist with these types of tasks, helping homebuyers avoid costly mistakes and providing invaluable peace of mind.
STEP 6: Search for foreclosed homes for sale.
Armed with their research, their budget, and their qualified real estate agent, homebuyers will be ready to start looking for foreclosed homes in their area. To browse homes for foreclosure, buyers can find foreclosure listings on the best real estate websites and the best foreclosure websites, though the stiff competition for these affordable properties can make it challenging to lock them down. Thankfully, a real estate agent can be a big help in this area.
“To locate foreclosed properties in your area, start by partnering with a real estate agent well versed in handling foreclosures. They have access to listing services [such as the MLS, or multiple listing service] that showcase properties,” advises Johnson, adding that foreclosure databases and bank websites are also valuable resources when potential buyers are searching for foreclosed properties. If they aren’t drawn to any of the listings they find online, prospective buyers can also research nearby housing auctions, working with their real estate agent to understand the logistics involved with purchasing an auctioned property.
STEP 7: Make a competitive offer.
To secure their chosen foreclosure home, buyers will need to make a competitive offer. This is another area where a real estate agent is an asset. By collaborating with their agent, prospective buyers can gain access to information that can help them decide how much they want to offer for the foreclosed property. Their real estate agent will research comparable properties in the area, referred to as comps, to assess the going rate for similar homes. This serves as the foundation for crafting a competitive offer.
The condition of the property will also require some consideration. Foreclosure homes are typically sold as is, which means these properties may require additional repairs and renovations. Researching potential renovation costs can allow buyers to adjust their offer price accordingly. Understanding the lender’s motivation to sell can also be beneficial. Some lenders might be eager to offload the property, giving buyers more negotiating power. A good real estate agent can help uncover these details, helping buyers craft a competitive offer that increases their chances of acceptance.
STEP 8: Lock in a mortgage rate.
Once the buyer’s offer is accepted, they’ll need to finalize their mortgage application. At this time, the lender will finalize the mortgage rate, which will then be locked in for a period of time (such as 60 days). As long as the borrower closes on the home within that time frame, the lender will honor the locked-in rate.
Locking in a rate can be especially helpful if market rates are on the rise. When the buyer closes on the home, they’ll get the interest rate they were guaranteed 60 days ago rather than the current market rate. However, if rates have fallen since their rate was locked in, buyers may end up paying a higher mortgage rate. Some lenders offer a “float down” option that allows the borrower to lower their locked rate if market rates fall. Borrowers will want to ask about this option when locking in their rate.
STEP 9: Get an appraisal and a home inspection.
Securing a home inspection and appraisal is important with any home purchase, but especially with foreclosures. While an appraisal assesses the property’s fair market value, which helps ensure the buyer isn’t overpaying for the property, a home inspection assesses the property’s condition, which may be particularly important with foreclosed homes.
“Home appraisals and inspections play a critical role when purchasing a foreclosed home,” says Johnson. “An appraisal ensures that you are paying a price based on the property’s condition and market value. On the other hand, inspections uncover issues that may necessitate significant repairs. Skipping these steps could result in surprise expenses.”
However, in some foreclosure transactions like cash offers or quick sales, obtaining an inspection or appraisal may not be an option. In these scenarios, buyers will need to work with their real estate agent to carefully weigh the risks involved. Without these professional assessments, buyers run the risk of encountering unforeseen problems that could require costly repairs or renovations down the road. Ultimately, whether buyers should proceed without an inspection or appraisal will depend on their ability to handle repairs and manage unexpected renovation costs.
STEP 10: Get homeowners insurance.
Before closing on the home, the buyer will need to show their mortgage lender proof of insurance. Lenders require mortgage borrowers to have an active homeowners insurance policy for the entire mortgage term. Insurance helps protect both the homeowner and the mortgage lender if the home is damaged or destroyed by a covered peril.
When searching for homeowners insurance, buyers will want to consider the types and amount of coverage they want. They’ll also need to keep their budget in mind—policyholders can opt for a lower deductible (the amount of a claim the homeowner must pay before the insurer covers the claim) in exchange for a higher monthly premium, and vice versa. The best homeowners insurance companies (such as Allstate or Lemonade) also offer a variety of discounts to help policyholders lower the cost of homeowners insurance.
STEP 11: Purchase the home.
When the buyer’s offer is accepted, congratulations are in order! But before they can move into their new home, homebuyers will need to navigate the final step of purchasing their foreclosed home: the closing process. This typically involves signing a mountain of paperwork, so patience will be key.
“For buyers, it is essential to be patient and ready for an extended process when dealing with foreclosure transactions,” advises Johnson. “These transactions often take longer than traditional sales due to legal and administrative procedures. Make sure you work with a real estate agent and consider consulting a real estate lawyer to help navigate the intricacies.”
During the closing process, buyers will need to be prepared to pay various costs, including origination fees, title insurance, and property taxes. Once all the paperwork is signed and the fees are paid, the ownership of the property will officially transfer to the buyer. Now comes the fun part: turning the foreclosed fixer-upper into a dream home!