Years ago, buying a foreclosure home was often difficult for borrowers. Whether you were a first-time home buyer or an investor looking to make a profit, finding foreclosures and jumping through the hoops of the application process made them unappealing. However, after the mortgage crisis in the late 2000s, purchasing a foreclosure home has become similar to buying any other home on the market. So, how do you buy a foreclosed home? Are homes cheaper in foreclosure?
What does foreclosure mean?
When a borrower takes out a mortgage to purchase a property, the mortgage essentially becomes a lien on the property. A home foreclosure occurs when a borrower fails to meet their mortgage payment obligations on a home loan and enters into default. When this occurs, the lender then seizes ownership of the property.
How does foreclosure work?
Home foreclosure is a process that allows the lender to take possession of the property after payment default. Foreclosure has multiple stages that the lender must follow before taking complete ownership. These steps include:
- Payment default: The foreclosure process begins when the borrower misses their payment obligations. While default officially begins after the first missed monthly payment, complete mortgage default does not normally occur until after several payments have been missed.
- A notice of default: After 90 days, the lender sends a notice of default to the borrower (This timeframe can vary based on the lender). This notice starts what is known as the pre-foreclosure stage. During this stage, the lender often offers the borrower a payment plan or other potential resolution to the missed payments before the process moves forward.
- The lender takes possession: If an arrangement is not established, the lender takes possession of the property.
- Notice of trustee’s sale: The lender must record an impending sale with the local county and publish a notice in the local newspapers.
- Trustee’s sale: The home is offered up for sale at a public auction.
- Lender ownership: If the home fails to sell at auction, the lender becomes the owner.
Are homes in foreclosure cheaper?
In general, homes in foreclosure or even pre-foreclosure are offered at a price that is lower than the current market value. This happens for a variety of different reasons. In the early stages, the homeowners are trying to unload the property before they lose possession, affecting their credit report. During this time, the seller is looking to move the home quickly, and the price is often well below value. After foreclosure and during the auction stage, the sheriff’s office and the lender are not looking to hold onto a home, so the price is often lower than the market value to move the home quickly. This is also the case when the lender takes complete possession.
Types of foreclosure sales
If you are considering a foreclosure property, you need to be aware of five different types of foreclosure sales.
Pre-foreclosure sales occur when the property owner is still in possession of the home, but the lender has notified them of default. The homeowner has the opportunity to sell the home during this time to repay the mortgage lender and avoid the negative impact of a foreclosure on their credit report. These homes are typically listed in the county and city courthouses and are listed as pre-foreclosures.
2. Short sales
After the notice of default to the homeowner, the lender may agree to accept less for the property than the current mortgage balance. In most cases, the borrower must show proof of financial hardship to the lender. When this happens, the seller can list the home as a short sale property for the amount under what is owed on the mortgage and agreed to by the lender. When properties are listed as short sales, they must also list that these sales are pending lender approval. Receiving approval for a short sale can take longer than a traditional mortgage.
3. Sheriff’s sale auctions
A sheriff’s auction sale takes place immediately after the grace period following the notice of default. This auction typically takes place at the local courthouse at a pre-determined date and time. The auction is designed to sell the home quickly and allow the lender to receive their payment quickly.
4. Government-owned properties
If a property was guaranteed by a federal government program, such as an FHA or VA loan, the government repossesses the home. Once this occurs, the homes are then listed for sale through a broker working for the government agency. In order to purchase these homes, you must look for a registered broker through the U.S Department of Housing and Urban Development.
5. Bank-owned properties
If a home does not sell at auction and is not backed by a government mortgage, the ownership of the home reverts back to the lender and is considered real estate-owned property or REO property.
Pros and cons of buying foreclosed properties
As with any type of home buying situation, buying a foreclosure home comes with various pros and cons. When considering a foreclosure home, it is important to evaluate each of these before deciding.
- Lower prices: As we have mentioned above, most times a foreclosure home is listed below the current market value.
- Faster closing times: Lenders are looking to recover their investment as quickly as possible, so the purchase and closing process is typically quicker than with a traditional purchase.
- Standard loan options: Unless specified as a cash-only sale, as long as the home is in a livable condition, you can still qualify for conventional and government-backed loans.
- Investment opportunity: Buying a foreclosure home under market value and repairing any potential problems allows you to flip the home for a solid profit.
- As-is sales: Homes listed as foreclosure properties are typically sold as-is, so you may need to budget for repairs and unplanned expenses as the previous homeowners had no incentive to maintain the property’s condition.
- Squatter’s rights: While the home may be legally foreclosed, if it has been unoccupied for some time, it may have attracted squatters that will require legal eviction before you can take possession. This process can cost thousands of dollars in legal fees.
- You may not be able to see or inspect the home before purchase: In some cases, interior tours of a foreclosure home are not an option, and you may not really know what you are getting into.
- May need cash: If you are considering the purchase of a foreclosure home at auction, you will need the purchase amount in cash.
- Lots of competition: The market for foreclosure homes is competitive, with many real estate investors looking to scoop up a home that they can quickly flip for a profit. This means that available homes often move very quickly.
Foreclosure homes offer another path to home ownership
Foreclosure sales are not just for investors but first-time homebuyers. Hero Home Programs, we work to help individuals and families achieve homeownership, including the purchase of foreclosure properties. Contact us today to learn more about how we can help you move into your dream home.