Buying a property in foreclosure can result in substantial savings, provided buyers understand how to capitalize on available options. Most people are familiar with buying homes through a foreclosure auction, but this is not always the best approach.
Foreclosure properties sold at public auctions often have two or more mortgage loans attached. Real estate auction prices are set based on the balance due on the first mortgage. Buyers are responsible for conducting due diligence to determine if additional mortgages, tax liens, or judgments from creditors are attached. If so, buyers must enter into negotiations to pay outstanding balances in order to take possession of the property.
Another drawback to buying foreclosed properties through auction is that buyers generally must provide funds within 24 hours of submitting the winning bid. This may not be a problem for investors buying homes with cash, but it can be a challenge for first-time homebuyers or those buying a foreclosed property as a second home.
Most people who buy houses at auction get pre-approved financing through their mortgage lender. Others take out a home equity loan using their primary residence as collateral to secure the loan. This strategy can put the buyers primary residence at risk of foreclosure.
Instead of attending foreclosure auctions, many people are now looking to buy bank-owned real estate. These properties include foreclosed real estate that was not sold by auction. When banks hold property, they sometimes make repairs to return the home to livable condition or make it more marketable. However, the properties are sold as is and any work done is not covered by the home warranty.
One of the biggest advantages of buying bank property vs. Foreclosure properties are real estate owned by banks that are sold with a clear title. This not only saves buyers money, but also allows them to take possession of the property quickly.
Bank-owned real estate is typically priced higher than homes sold through auction, but all the expensive and time-consuming details are taken care of. Many states include a redemption period for properties sold through auctions. If foreclosed homeowners are able to pay off the outstanding loan balance, they have the option to buy back the home from the winning bidder. The possibility of owners claiming their property when buying houses through banks is eliminated.
The downside to buying bank-owned foreclosures is that mortgage lenders rarely lower the purchase price. Buyers often compete with multiple buyers and must be prepared to submit their highest bid. The exception to obtaining reduced prices through banks is if substantial repairs are noted on the home inspection that were not recorded when the property was initially foreclosed on.
One option for buying foreclosed properties through banks is Fannie Mae’s Home Path Mortgage program. In addition to offering discounted real estate, Home Path offers special financing options for buyers with poor credit, along with a low 3 percent down payment requirement.
Many real estate investors are turning to Fannie Mae foreclosures because these properties often qualify for grants under HUD’s Neighborhood Stabilization Program. Individual buyers and investors can apply for NSP grants when purchasing real estate in areas that have high foreclosure rates.
Combining NSP grants with Home Path’s low interest, low down payment loans allows buyers to purchase real estate at substantial savings. Details about Fannie Mae’s Home Path mortgage program are available at HomePath.com.
Buying a foreclosed property is not without risk. Anyone planning to buy foreclosed homes as a primary residence or investment property should familiarize themselves with the pros and cons of buying distressed real estate.
The main objective is to buy houses well below market value, make the necessary repairs and get instant value on the property or quickly sell the property for a profit. Buyers must carry out due diligence to ensure that the home is actually a good deal and not a money pit.
