How to Buy a Foreclosed Home

If you're looking to save a lot of money on the purchase of your next house, you might consider buying a foreclosed home. Foreclosure occurs when the homeowner is unable to keep up with their mortgage payments for at least several months. As a result, the lender seizes the house and quickly sells it again to recover those financial losses. Foreclosed homes become available in much greater quantities when the economy is down.

Buying a home in foreclosure is often a lengthy process and one you should fully understand ahead of time. When considering the purchase of your next home, take some time to thoroughly research the process so you'll be prepared to go into it. To start with, check out our easy guide on how to buy a foreclosed home.

What Does Foreclosure Mean?

Foreclosures occur if a homeowner is behind on their mortgage payments, typically by a period of at least several months in a row. The mortgage lender then takes the property back or "seizes" it. 

The lender then proceeds to try to sell the home as quickly as possible to recoup their investment. This can result in the home being sold for below its current value, which can potentially create a great deal for interested buyers. 

When you buy a house in foreclosure, you're buying it directly from the lender, which is typically a bank or other government agency. This makes the process different from when you buy a house from a standard homeowner. 

There can be additional steps to the process and extra research involved when you buy a lender-owned home. That's when preparing ahead of time can help save you time and confusion.

Types of Foreclosure Sales

There are a few different types of home foreclosure sales. Courthouse auctions are just one popular example of a home foreclosure sale. Depending on the type of sale, interested buyers may be able to purchase a home during different stages of the foreclosure process. It can be helpful to understand the different types of foreclosure sales in advance for this reason.

Before looking further into buying a home at auction, first, familiarize yourself with the different kinds of foreclosure sales. There are a handful of different terms and processes to be aware of. 

Also, be aware that you can either work with a licensed real estate agent to buy a home in foreclosure or with a bank directly. There can be pros and cons to working with both. Here are the main types of foreclosure sales to be aware of:

• Preforeclosures: Homes in the early stages of foreclosure can be known as preforeclosures. This step involves requiring a lender to notify the homeowner that foreclosure is at risk due to their missed payments, along with a proposed process that could help them catch up. At this stage, certain homeowners will go ahead and sell their homes.
• Short sales: When a homeowner is "underwater" on their mortgage, it means they owe more on their house than the property is worth. If this happens, the mortgage lender can agree to a short sale, which involves selling the home for less than the current balance on the mortgage to avoid going into foreclosure entirely.
• Sheriff’s sales: Public auctions by a sheriff's office can occur once the foreclosure process is completed. Certain states require lenders to hire a trustee company or law firm to officially host the sale. The general public can then bid on the house.
• Bank-owned properties: After an auction, if a foreclosed home doesn't get a satisfactory bid, the mortgage lender or bank might decide to buy the house. The house is then put on the open market as the bank attempts to get the highest possible sale price.
• Government-owned properties: A foreclosed house may also be possessed by a government entity in certain cases. State, local, and federal governments can all offer sales on foreclosed homes.

Why Foreclosed Homes Are Cheaper

Buying a foreclosed home can be cheaper than buying a regular home for several reasons. When buying a house in foreclosure, different incentives might be offered that can further reduce the overall price of the home. 

These can include a reduced down payment, a lower interest rate, or an elimination of appraisal fees and a portion of the closing costs. Buying foreclosed homes means looking at properties that start out being sold at a notable discount from current market value. Further incentives only bring the price down even more from there. 

When buying a foreclosure, the buyer has a certain advantage over the seller. Especially in the preforeclosure or short-sale stages, the owner, or bank, is quickly trying to make up their investment and avoid further potential losses. 

Acting quickly to sell the property can mean more incentives are offered to the buyer on top of an already lower-than-typical listing price. Banks must act quickly to resell the home to avoid losing possession of it. In this situation, the buyer has the power in the sale and can stand to save much more money than usual.

How to Buy a Foreclosed Home

If you've been wondering what the actual process for how to buy foreclosed homes is, read on. Depending on the state you live in, the process of buying a foreclosed home may differ, so you'll need to become familiar with how it works in your area. 

The process also depends on which stage of the foreclosure a home is in. Regardless, here are five common steps for buying a home in foreclosure. 

Step 1: Apply for a Pre-Approved Home Loan

Applying for a pre-approved home loan is the first step any potential home buyer should take, whether they're buying a foreclosed home or purchasing the property from an individual seller.

"With changes to the lending industry, securing a mortgage or home loan can take much longer than it did previously," said mortgage officer Roger Rieland.

Not only can being pre-approved speed up this process, but it also gives the buyer a ballpark for their buying power. Rieland cautions potential home hunters, however, that simply because you may be pre-approved for a $400,000 loan does not necessarily mean you should purchase a $400,000 home.

Most lenders and mortgage brokers require loan recipients to obtain homeowners insurance, especially on foreclosed homes that may be at risk for substantial damage and need repairs. Once you're approved for a loan, your lender will ask for proof of homeowners insurance. 

It's a good idea to compare several quotes from various insurance companies to ensure you find the best price. Independent insurance agents can help you shop around for the best and most affordable homeowners insurance available in your area.

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Step 2: Find a Real Estate Agent Experienced in Foreclosed Sales

Unlike traditional home sales, many foreclosed properties are not listed on online realty sites or other property search sources. And, if they are listed, very few details are provided. Veteran real estate agent Daryl Bronniche said if buyers are intent on finding a foreclosed property, they need to enlist an agent with their ear on the pulse of the local market.

"As I work with several banks to help unload their depressed or foreclosed properties, I tend to find out about listings long before they are publicized," he said.

Having an experienced agent do the house-hunting for you can clear up considerable time and energy for you to devote to securing the financing aspect.

"If you have certain standards or expectations for a house, be sure to explain that to your agent," Bronniche added. "Sometimes, especially those who work exclusively for banks, agents may try to pressure you into a home that doesn't meet your specifications. Be firm on your checklist of wants and needs."

Step 3: Conduct a Full Title Check

Real estate attorneys advise people thinking about purchasing a foreclosed home to have a full title check done for the property. Scott Berry of Berry Law Offices said this is an important step that shouldn't be overlooked.

"I've been through many foreclosures on both sides," Berry said. "The title is always my biggest concern when you're buying a foreclosed home. It's kind of a hope and a prayer that everyone before you did what they're supposed to do."

As homes can exchange hands several times throughout the foreclosure process when banks purchase loans from other lenders, it's vital to be aware of any outstanding state or federal tax liens on the property. The new owner is responsible for any of those outstanding debts. Some homes still awaiting the final foreclosure process are in a "redemption period," meaning the former owner still has a chance at occupancy.

"You may not even have the right to enter the house until the redemption period is over," Berry said. This period is typically six months, but that depends on state and local regulations. "It's a whole different process depending on where you are in the nation."

Step 4: Get the Home Inspected

As bank-owned foreclosed homes are typically sold as-is, there's generally little room to negotiate on the price of any needed repairs before the purchase is final. In a traditional home sale, the buyers can often request the current owner to replace a broken window or remove a fallen tree. 

But in a foreclosure sale, banks typically don't want to go through that trouble. They simply want to unload the property and recover some of their losses. That's why it's so important to get any foreclosed home you're interested in buying inspected by a professional.

"I see a lot of foreclosed homes that need extensive repairs," said rehab construction consultant Lee Alley. "I find anything from holes punched into walls to all the copper wiring and plumbing has been removed."

You don't want to find out after the purchase that an entire section of the roof needs to be replaced. By having a professional estimate of repairs needed for the home, you can decide if the bank's asking price is low enough to make the deal appealing, even after the expense of repairs is factored in.

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Step 5: Study the Market and Make an Offer on the Home

When you find a home you want to make an offer on, an experienced real estate agent who deals in foreclosed properties can give you an idea of the going rate for similar properties in your area. In some places around the country, foreclosed homes are bought at a much faster pace than others. For example, in Bronniche's service area, two-bedroom homes are in high demand.

"I can see a listing for a two-bedroom, foreclosed home at 8 a.m., and by noon, someone has snatched it up," he said. "Meanwhile, I've been trying to sell a four-bedroom home in the same neighborhood for months without a single offer."

Find out how similar homes in your area are selling, and move accordingly. You might want to consider making an offer slightly above the bank's asking price if foreclosed properties of comparable features and value are being sold quickly in order to avoid missing out on the chance. If the foreclosed homes in your area stay listed for longer, you may be able to make a lower offer and take your time.

Benefits of Buying a Foreclosed Home

There are a few notable benefits of buying foreclosed homes over regular homes. For one, buying a foreclosure can mean lower sale prices. Due to the perceived risk of buying a house in foreclosure, these homes are often available for sale for much cheaper than traditional homes.

Also, the seller of a foreclosed home is looking to move the property quickly to recover financial losses. That means a greater potential for the seller, typically a bank or government agency, to work with you and offer extra incentives. 

Finally, buying a home in foreclosure can come with the benefit of the property being cheaper at purchase time, leading to it being easier for the buyer to build equity. Fixing up a foreclosed home can increase its value and lead to you gaining a large amount of equity fairly quickly and easily.

Drawbacks of Buying a Foreclosed Home

Buying foreclosed homes also comes with a handful of possible disadvantages. When buying a house in foreclosure, you're buying the property as-is. 

Often, you're not able to request repairs before you buy, so you'll need to ensure that you can complete any necessary projects after purchasing. That's another reason to have a professional inspection of the property completed before you firmly decide on buying a foreclosure.

The process of buying foreclosed homes can also be more complicated than the traditional home-buying process. Foreclosures may be tied up by several different parties like government agencies, banks, and the homeowner, which can lead to a frustrating and lengthy process before the sale is completed. 

Finally, there can be a lot of competition when buying foreclosed homes due to the lower sales prices and extra incentives. So, if you're going to buy a foreclosure, be willing to endure a more complicated process and stiffer competition.

Protect Your New Home Purchase

You'll need to weigh the pros and cons of buying a home in foreclosure before deciding if it's the right move for you. Also, no home purchase is complete without the proper coverage provided by a homeowners insurance policy. 

When shopping for coverage, work together with a local independent insurance agent who can help you find the policy that's right for you. These agents shop and compare coverage and rates from several different carriers for you, ultimately finding you the best blend of protection and price for your new property. 

FAQs about Buying Foreclosed Homes