Most buyers associate buying a foreclosure with getting a home for an extremely reasonable price. Though that assumption can be true, there is also a good amount of risk in buying a foreclosed property.
Approximately 5 million homes have gone through foreclosure in the last half decade since the housing market collapsed. To make sure purchasing a foreclosed home is the right path for you, hire a good buying agent, one who is preferably familiar with the foreclosure process, and read through the following tips of the purchase process.
Things to Consider
Foreclosure is a great way to pick up a terrific deal on a home, but foreclosed homes that have been neglected or abandoned for months, or perhaps even years, can come with hidden costs that turn your “terrific deal” into a money pit. Consider the following when buying a foreclosure:
- Invest in a home inspection. Home inspections are a good idea for any purchase but are a no-brainer for foreclosures. Banks and counties are not required to offer disclosure. A home inspector can provide a complete report on the property’s structure and mechanics. A home inspection will give you a better picture of what you are buying and give you a potential forecast of things that will need to be replaced in the near future. Home inspections typically cost $300-$400.
- Have any issues from your home inspection investigated. Foreclosed homes are at risk for plumbing, electrical and mechanical issues. Broken or leaky pipes can cause thousands of dollars of damage. Dirt and debris can accumulate in duct work of forced-air systems, and humidity can corrode heat exchangers of boilers and furnaces. You’ll be responsible for issues from deferred maintenance.
- Is it move–in ready? If not, what will it take to make the home livable? Foreclosed homes come in a wide range of conditions. Some are just houses that sat empty and neglected for months, with minor maintenance problems. Others are unlivable. If your desired property falls under the latter, do you have the cash on hand for repairs or will you need financing?
Financing Available for Foreclosure Purchases
First things first. Talk to a mortgage lender before writing up a purchase agreement for any home purchase, foreclosures especially. If a foreclosed property is in decent condition, you could possibly qualify for traditional financing. If the property is in poor condition, traditional financing may not be an option. Foreclosures often attract multiple offers, so financing should be set up in advance. Homebuyers can finance properties in need of rehabilitation with the following loan programs:
FHA 203(K) Streamline
- For homes needing minor, non-structural repairs
- Option for purchase or refinance
- Finance up to $35,000 in improvement before move-in
- Good for homes needing simple improvement, such as roof replacement, plumbing and electrical work, flooring and window replacement, etc.
- Requires a 3.5% down payment of the “as completed” value
FHA 203(K) Standard
- For homes needing major rehabilitation
- Option for purchase or refinance
- Renovation costs may exceed $35,000
- Good for homes needing structural alterations, such as room additions, major bathroom and kitchen remodeling, finishing a basement, etc.
- Requires a 3.5% down payment of “as completed” value
HomePath® Renovation Mortgage
- For buyers purchasing Fannie Mae-owned properties
- Requires a 5% down payment
- Available to owner-occupants and investors
- Finance up to 35% of the appraisal, as-completed value for repairs; no more than $35,000
HomeStyle® Renovation Mortgage
- Option for purchases and refinance
- Available to homebuyers, investors, non-profit organizations and local
- Requires a down payment equal to 5% of the as-completed value of the home
- Total cost of the project can not exceed 50% of the as-completed value
- Luxury items are included in eligible renovations, such as swimming pools, tennis courts, landscaping, etc.
Buying a foreclosed home is a little different from your typical resale purchase. Consult with your mortgage lender on the option that would best suit your financial needs.
Looking for more information on renovating a home? Our Rehab Guide is the ultimate guide for fixing up your home.