How To Buy A Foreclosed Home

Amy Fontinelle is a freelance writer, researcher and editor who brings a journalistic approach to personal finance content. Since 2004, she has worked with lenders, real estate agents, consultants, financial advisors, family offices, wealth managers.

Amy Fontinelle is a freelance writer, researcher and editor who brings a journalistic approach to personal finance content. Since 2004, she has worked with lenders, real estate agents, consultants, financial advisors, family offices, wealth managers.

Amy Fontinelle is a freelance writer, researcher and editor who brings a journalistic approach to personal finance content. Since 2004, she has worked with lenders, real estate agents, consultants, financial advisors, family offices, wealth managers.

Amy Fontinelle is a freelance writer, researcher and editor who brings a journalistic approach to personal finance content. Since 2004, she has worked with lenders, real estate agents, consultants, financial advisors, family offices, wealth managers.

Rachel Witkowski is an award-winning journalist whose 20-year career spans a wide range of topics in finance, government regulation and congressional reporting. Ms. Witkowski has spent the last decade in Washington, D.C., reporting for publications i.

Rachel Witkowski is an award-winning journalist whose 20-year career spans a wide range of topics in finance, government regulation and congressional reporting. Ms. Witkowski has spent the last decade in Washington, D.C., reporting for publications i.

Rachel Witkowski is an award-winning journalist whose 20-year career spans a wide range of topics in finance, government regulation and congressional reporting. Ms. Witkowski has spent the last decade in Washington, D.C., reporting for publications i.

Rachel Witkowski is an award-winning journalist whose 20-year career spans a wide range of topics in finance, government regulation and congressional reporting. Ms. Witkowski has spent the last decade in Washington, D.C., reporting for publications i.

Updated: Mar 10, 2023, 4:47am

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If someone is looking to buy a foreclosed home, it’s usually because they want to flip it and sell at a profit or simply want to get a good deal on their home, especially in a hot housing market when prices are soaring.

But foreclosures won’t always save you money. They aren’t always priced below market value, and often have hidden (or not-so-hidden) problems that can be expensive to fix.

If you’re struggling to find an affordable home in a tight housing market, you might be looking for ways to buy a home for less. Here’s what you need to know about buying a foreclosed home.

What Is a Foreclosure?

A foreclosure is a home a lienholder (or most often, the lender) has taken from a borrower who has not made their mortgage payments for a certain period of time. Once the home is foreclosed, the lender or leinholder will want to sell the home at a price as close to how much was owed on the mortgage as possible.

Types of Foreclosures

Here are the types of foreclosures categorized by who can place a lien on the home:

• Bank. Real estate-owned (REO) properties are homes that banks have foreclosed on and now own.
• County. County-owned foreclosures are properties that the county tax collector has seized because the owner didn’t pay property taxes.
• Federal. The IRS and Treasury Department can seize properties for nonpayment of income taxes and other reasons.
• HUD. The U.S. Department of Housing and Urban DEvelopment (HUD)-owned foreclosures are properties where a borrower stopped making payments on their Federal Housing Administration (FHA) loan.
• HOA. When a homeowner falls behind on their homeowners association (HOA) dues, the association can foreclose.
  Mechanic/contractor. A professional who performs work on a home can foreclose if the homeowner doesn’t pay in full for the work.

Pre-foreclosures and Short Sales

When you’re researching foreclosures, you might also come across these two types of property listings:

• Pre-foreclosures. Pre-foreclosures are homes that might end up in foreclosure but aren’t there yet. These are properties where the borrower is so behind on payments that the bank has started the foreclosure process. The owner of a pre-foreclosure home might be interested in selling if the right deal comes along, regardless of whether it’s listed. But the lender might also work with the owner to avoid foreclosure.
• Short sales. When the loan servicer lets the borrower sell the home for less than the amount owed on the mortgage and forgives the remaining balance, it’s called a short sale. If the servicer won’t allow it or the borrower can’t find a qualified buyer, the lender may have to foreclose. A short sale might be in pre-foreclosure, but not necessarily.

While foreclosures have remained fairly low during the pandemic, there’s a possibility they could increase as mortgage relief programs end in the coming months. These programs are temporary and meant to help borrowers get back on track with payments to keep them in their homes during hardships due to Covid-19.

Three million homeowners were behind on their mortgage payments as of April 2021, according to the Consumer Financial Protection Bureau (CFPB). They will need to work out a solution with their mortgage servicers to keep their homes.

Buying a Foreclosed Home

Before shopping for foreclosures, you’ll need to take the same steps you would before shopping for nonforeclosed homes: figuring out how much you can afford and how you will finance the purchase.

How Much Can I Afford?

If you want to finance a foreclosure with a mortgage, you’ll need to analyze your income and expenses to determine how much house you can afford.

Lenders will look at the ratio of your pre-tax income to your other debts and financial obligations like credit cards, student loans, auto loans, alimony and child support. They’ll want your monthly house payment (including property insurance and taxes), plus your monthly payments on these other obligations to total no more than 50% of your pre-tax income, and that’s only if you have excellent credit. However, most lenders will look for your debt-to-income ratio (DTI) to be less than 36% when underwriting a mortgage.

Also add up your other expenses, including taxes, HOA fees, health insurance, transportation, utility bills, groceries, pet care and child care. Consider how much you want to save for home repairs and upgrades, emergencies, and retirement, as well as how much you want to spend on entertainment and travel. Then you’ll know what you’re comfortable spending on a home, not just what a lender will qualify you to borrow.

Get a Preapproval Letter

While some foreclosures may require you to pay cash or take out a hard money loan (a short-term, higher-interest real estate loan for investors), others do allow mortgage financing.

Mortgage preapproval requires the lender to review the borrower’s credit history and financial documents, such as tax returns, W-2s, 1099s and bank statements to see how much they qualify to borrow. If you’re buying a bank-owned home, getting a mortgage preapproval letter may help you compete with the all-cash buyers who often purchase foreclosures.

How to Look for a Foreclosure

To learn about all your options, looking for a foreclosure can require checking different sources than you would for an owner-occupied home.

Online Options: Foreclosure Websites

Using sites that specialize in foreclosures can help you learn about options that aren’t on the Multiple Listing Service (MLS). Here are a few free sites to try:

• Homepath.com. Shows Fannie Mae-owned foreclosures
• HomeSteps.com. Shows Freddie Mac-owned foreclosures
• HUD.gov. Shows government-owned foreclosures
• Auction.com. Shows foreclosures that aren’t on the MLS
• Zillow, Redfin. Through search filters, users can identify foreclosures for sale

You can also do an online search for the name of a county (for example, “Cook County foreclosure auctions”) to find local auctions, which might be held online or in person.

Your Real Estate Agent

A real estate agent may also be able to help you find a foreclosed home that meets your needs. While experienced investors may not need a real estate agent’s expertise, individuals buying a foreclosure for the first time, especially if they want to live in it, can benefit from working with an agent who has helped other people buy foreclosed homes.

An agent can help you determine a good price to offer on the house, especially if you can find a contractor to estimate repair costs for you. But make sure the agent is comfortable with and has experience dealing with foreclosed homes as they are time consuming and tricky; not every agent is willing to negotiate these.

While you can work directly with the bank to buy the home, you might get a better deal by using a buyer’s agent who represents only your interests. As the seller, the bank will be responsible for the agent’s commission. However, since the bank might have to pay your agent’s commission out of the sale proceeds, the bank may be less willing to lower its price.

Tips About the Auction Process

Foreclosure auctions are usually run by a local county representative (such as the sheriff) or a private company. Buying a foreclosure at a real estate auction means learning how the specific in-person auction or auction website works. Here are some tips.

1. Be prepared to make a cash deposit. Doing this before the auction starts is often a requirement if you want to bid.
2. Home inspections may be limited. Potential buyers may not have access to the property’s interior or backyard, and photos can’t provide a complete picture of its condition. Some foreclosure auctions do make properties available for home inspections at specific times, and it’s smart to attend those showings.
3. Traditional financing may not be an option. You may not be able to use traditional mortgage financing to purchase a foreclosure at auction because these loans don’t close quickly enough. The auction may require quick payment via cash, certified check or wire transfer. But some auctions do allow financing, and if you have the cash to buy up front, you may be able to mortgage the property later with a cash-out refinance.
4. Contingencies might not be allowed. In most home sales, the buyer can include contingencies that let them rescind their purchase offer without penalty if the home turns out to have serious problems, or if the buyer can’t secure financing. Auction listings often state that the home is offered for sale as-is with no contingencies.
5. The home might have a right of redemption. Just because you win the auction doesn’t mean you’ll get the property. Before you buy an auction property, you should learn if the owner has a right of redemption under state law that allows them to get their property back by paying off their debt. The redemption period can last months.
6. Check the title. Foreclosed homes may have multiple liens. A title search can tell you what liens you may be responsible for paying off if you win the auction.

Pros and Cons to a Foreclosed Home

Before you decide to bid on a foreclosure, consider the following pros and cons.

Pros

• The bank, county or government agency that owns the home may be willing to sell at a below-market price because it pays carrying costs to continue holding it.
• You might get a nice return on your investment if you’re able to buy the home below market value and if it doesn’t need expensive repairs.
• You might be able to get a home in a nicer neighborhood than you could otherwise afford (but this opportunity also exists with owner-occupied fixer-uppers).
• If you’re buying a foreclosure at auction, you’ll be able (and required) to close the deal quickly.

Cons

• Foreclosed homes are sold in as-is condition, with the buyer responsible for all repairs. The property may be in bad shape due to neglect by the last owner or vandalism while the property sat vacant.
• Buyers who require financing may have trouble competing with all-cash buyers, who are often investors.
• Your options may be limited, especially when the local economy is strong or the government has asked banks to halt foreclosures, as it did in response to the pandemic.
• You may get less upfront information about the property’s condition, such as when the roof was last replaced, making it harder to predict future expenses.
• The property may have undisclosed liens. It’s important to do a title search before closing and purchase an owner’s title insurance policy to protect yourself.
• Institutional owners may move slowly on foreclosure sales, so this presents a challenge if you want to move into the home quickly.

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