How to Buy a Foreclosed Home
To buy a foreclosed home, you’ll need to do some research, set a budget, contact a real estate agent, and get your finances and documentation together.
Written by Payton Ternus
Reviewed by Melanie Reiff
The steps to purchase a foreclosed home include doing some research, setting your budget, working with an experienced real estate agent, getting your finances in order, and gathering the appropriate documentation before you commit.
If you’ve been dreaming of owning a home but your budget is a little tight, you may want to consider buying a foreclosed home. You may be able to find a beautiful home under market value, but you’ll need to do some research and assess the risks.
MORE:How to choose the right kind of home insurance for you
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What is a foreclosed home?
A foreclosed home, or real estate owned property (REO property), is a house usually owned by a lender or bank after the original homeowner defaulted on their mortgage payments.
When a homeowner stops making their mortgage payments, their mortgage lender can foreclose on the home and take ownership of it.
Mortgage lenders and banks will then try to resell the homes they foreclosed on. The homes will usually be listed at lower selling prices or have a smaller down payment requirement. That’s one of the main perks of buying a foreclosed home: you can get a house that would normally be out of your price range if it was listed on the market.
Key Takeaway Foreclosed homes are usually cheaper to buy than standard homes, but you’ll need to make sure you understand the risks before making the purchase.
How to buy a foreclosed home
Purchasing a foreclosed home can definitely come with its own set of risks, but the actual process of buying the home isn’t too complicated. It’s fairly similar to buying a typical home—there may just be some extra work for you to do.
Do your research
The first thing you need to do to begin the process of buying a foreclosed home is research. There are several methods for buying a foreclosed home, and the right option for you will depend on your specific needs.
Let’s break down the most common ways foreclosed homes are bought:
- Pre-foreclosure: also known as a “short sale,” this kind of sale happens while the original homeowner still owns the property but knows there is the chance of foreclosure. The homeowner gets permission to sell the home for less than what is still owed on the mortgage.
- Real estate auction: the traditional method of buying a foreclosed home. Third-party trustees run the sale of homes owned by lenders or banks. There are risks with this method, such as the home needing extensive repairs or not being able to get an appraisal.
- Buy from a bank: you can buy a foreclosed home from a lender or bank directly. They will take care of any liens on the title, evict the previous homeowners, and hire a real estate agent to get the home onto the housing market.
- Buy a property from the government: similar to the foreclosed properties owned by lenders and banks, some properties will be assumed by a government agency if the owner defaults on a government-backed mortgage. These are typically sold in their current condition—any repairs will become your sole responsibility.
Set your budget
Foreclosed homes are usually cheaper than other homes on the market, but buying any house is still a significant expense. You’ll need to figure out your housing budget to see what home prices you can afford.
First, create your household budget by listing out your monthly expenses and income. Make sure to include estimates for things like ordering food and any regular entertainment or activities. This information will help you determine how much you can afford to pay on a monthly mortgage payment.
Next, it’s time to look at your
debt-to-income (DTI) ratio
. Most mortgage lenders will want your DTI ratio to be no higher than 43% of your gross monthly income.You’ll want to keep possible repairs in mind when deciding on your budget. If you buy a foreclosed house at the top of your budget and it ends up needing rather expensive repairs, you could get stuck in a sticky situation.
Contact a real estate agent
You won’t want to go through this process on your own. Finding a real estate agent experienced in foreclosures and REO properties will be extremely helpful in your home buying process. They’ll know all about the local housing market and will have access to a multiple listing service.
A real estate agent will be able to tell you if the price and risk levels would still be worth the purchase. They can also help you find foreclosed homes others might overlook.
Having an expert will help you navigate the specific laws of your state regarding foreclosures as well.
Get your finances ready
No matter what kind of home you buy, it’s in your best interest to get
preapproved
for a mortgage. A preapproval letter from your mortgage lender will tell you exactly how much you can spend—and it makes you an attractive buyer to anyone trying to sell a home.Credit can be a sensitive issue when it comes to mortgage lenders and foreclosures. Having a good
credit score
will help you in the preapproval process.It may be tempting, but do not commit to the first mortgage lender that happens to have a good rate. You’ll want to compare all of your options to see what will best fit your needs.
You can opt for a traditional mortgage, but lenders may be hesitant over a foreclosure. Make sure you check out the government-backed financing options of 203(k) loans, HomePath ReadyBuyer, and HomeStep.
Key Takeaway To purchase a foreclosed home, you’ll go through all the normal home buying steps, but you may need to investigate alternative mortgage options and pay attention to extra repairs the home might need.
Make an offer
You’ve found the foreclosed home you want—what now? It’s time to place your offer.
Depending on the situation, you will need to send your offer to the previous homeowner if they still own the place, the bank’s listing agent if the bank owns the home, or the home’s trustee or attorney.
You don’t want to make too low of an offer. If your offer is too far below the market value, it could be rejected, and you won’t get the house you want. Your real estate agent can help you determine the offer you should make to the sellers.
In your offer, it’s a good idea to include a requirement of ahome inspection before the sale can be finalized. The inspection will allow you to determine the condition of the home and get any repair cost estimates.
Get the title information
Try to conduct a title search before making any real estate purchase. You’ll find any
liens
, or outstanding debts, and can bring them to the attention of the seller. Doing a title search is especially recommended if you’re buying a foreclosed home due to the nature of a foreclosure itself. During this process, you’ll be able to verify that the deed to the home is correct.
Home insurance for a foreclosed home
Regarding foreclosed homes, homeowners insurance can get expensive quickly. In the eyes of insurers, foreclosed homes are typically associated with high levels of risk and may not have all of the important upgrades they need.
Here are the main factors that can cause home insurance rates to rise when it comes to foreclosed homes:
- Old plumbing
- Old roofing
- Poor structural conditions (broken windows, sagging porch, overgrown lawn, etc.)
- The surrounding neighborhood (crime level, other foreclosures in the area, etc.)
- Time the home was vacant
Key Takeaway You may be able to save quite a bit of money by purchasing a foreclosed home, but be prepared to face higher rates on your homeowners insurance.
How to save on home insurance
Foreclosed or not, every home needs to be protected by
homeowners insurance
. It can be hard trying to find the best rate out of all the insurance companies on the market—but thanks to Jerry
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What are the financing options for a foreclosed home?
There are a few government-sponsored options for financing a foreclosed home: FHA 203(k) loans, HomePath ReadyBuyer, and HomeSteps. You can also try for a conventional mortgage, but private lenders may be hesitant about foreclosed homes.
Is it hard to insure a foreclosed home?
Homeowners insurance is usually more expensive for foreclosed homes. They are typically associated with higher risk levels and a lack of important updates, so they can be more difficult to insure.
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