If your ability to afford the mortgage payments on the home you want to buy is causing you concern, buying a foreclosure home may make a lot of sense. Plus, it will also allow you to get more for your money — which could enable you to get to live in the neighborhood you really want.
If a homeowner fails to keep up with their mortgage payments, the lender can begin foreclosure proceedings, and the sale of foreclosed homes can sometimes be a bargain to home buyers. This is because the lender wants to release their money from the property as soon as possible.
If you’re thinking about how to buy a home that’s in foreclosure, be sure to do your research because there are extra stages involved. As an example, below are some of the steps involved in the sale of a foreclosed home that you need to be aware of.
How to Buy Foreclosed Homes
Although there are more risks involved in buying a foreclosed home, this shouldn’t put you off. In fact, if you’re willing to do a little more research and accept some increased risk, you’ll likely find that the process isn’t really that different from a traditional purchase.
Setting Your Budget
First, it’s important to understand how much money you have to spend when you’re purchasing property — whether it’s a foreclosure or not. Plus, even though a foreclosed home is a better value, you still need to know your budget.
Start by writing down all of your income and expenditures for the month, and remember to include discretionary spending, like entertainment or purchases. This should show you how much you can afford to spend on mortgage payments and reveal how much a bank is likely to lend to you. This is an essential step because you don’t want to overextend yourself financially and end up in a situation in which you can’t afford to pay the mortgage — which could risk your home going back into foreclosure, with you on the wrong side of it this time.
Lenders will normally look at your debt-to-income ratio to determine whether you qualify for a loan. Typically, they don’t want you to have debts that add up to more than 43% of your gross monthly income.
Additionally, with a foreclosed home, you have to be particularly wary of using your maximum budget. That’s because a foreclosed home is more likely to need extensive repairs, so you’ll have to make sure you have emergency funds to account for any unexpected problems.
Getting the Right Help
The real estate agent you choose to work with is even more important when buying a foreclosure. Specifically, a real estate agent who is experienced in helping buy foreclosures and who has a good knowledge of the local area will know when a home is a bargain. They can also help you uncover whether there are greater risks than you imagined in your purchase.
What’s more, the right agent can also help you find foreclosed homes that you might have otherwise missed. They can also guide you through the process, alerting you to any dangers and helping you overcome the particular challenges involved with buying this type of home. And, because each state has different rules and laws regarding foreclosures, it’s important to get help from a real estate agent who knows these regulations inside out. An agent who has experience with foreclosure purchases can certainly make a difference.
It’s always advisable to get pre-approved for a mortgage in any home purchase so you can make sure that you can actually get the loan that you believe your income justifies. Moreover, applying for pre-approval will ensure that you’re not wasting your time looking at homes that are over your budget. Plus, sellers often prefer to work with someone who has a pre-approval letter. This shows them that you can get a mortgage for the cost of the home, which could otherwise delay or end a home-buying process.
When you’re looking to get a mortgage, lenders will also consider your credit score. So, before you apply, make sure that your credit score is as good as it could be. And, if you have a cash business, confirm that your income can be verified as most lenders will want to verify any cash deposits, especially if they are significant.
Also, keep in mind that there are a variety of expenses involved with a mortgage, so be sure to compare a few different loan providers before choosing the one that’s right for you. This way, you can confirm that the interest rate is competitive and the fees aren’t excessive. In the meantime, even if you’re pre-approved, you don’t have to go with that lender when you actually take out the mortgage.
Likewise, be careful not to change your financial situation between pre-approval and when you need the mortgage. For example, taking out a new loan could change your debt-to-income ratio, thereby disqualifying you for the mortgage you thought you could get.
Making the Offer
An important part of how to buy a foreclosed home is putting in an offer for it. Your real estate agent should help you with the offer amount, and then they will present it to the seller unless it’s being sold at auction. This figure should be competitive, but still offer you good value for money so that your offer isn’t rejected by the lender or government agency.
Notably, your offer should also include a home inspection contingency to ensure that you aren’t buying a property with serious defects. This will mean that your purchase won’t go to closing until a home inspection has been satisfactorily completed.
The Home Inspection
The home inspection is a critical aspect when buying a foreclosure. Your home inspector will walk around the property looking for problems, which will then be detailed in their report. If they discover something substantial, you’ll probably be able to get a discount from what you’ve agreed to pay.
However, unlike a traditional home sale, in a foreclosure home inspection, you can’t go back to the seller to carry out the repairs because the lender has no interest in repairing damage to the property. So, if there are too many problems, your only option may be to walk away from the deal. Fortunately, while most lenders do not make repairs on foreclosed homes, they do allow home inspections —most of the time.
Conversely, if the foreclosure is at auction, you won’t have the option to get a home inspection. And, while you could get an excellent bargain at auction, the risks are also very high. Homes purchased at auction are bought in “where is and as-is” condition, and you’ll also be responsible for any liens or title encumbrances on the property. This is what makes buying a home at auction very risky, and you should never do so without a significant amount of experience. In this case, having an attorney run a title search will be critical.
If you’re keen on finding a bargain on your next home, a foreclosure could be right for you, but it’s highly advisable to do your extra due diligence. And, as long as you understand the risks involved and work with a knowledgeable real estate agent, it could work out really well.