How to Buy a Foreclosed Home in 2021

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If you’re looking to buy a home, but want to save some money, buying a foreclosed home can help. Whether you want a home outside of your budget or you just want to increase your options, foreclosed homes can give you amazing discounts on expensive homes.

Foreclosed homes are owned by banks and other mortgage lenders. When homeowners with mortgages cannot make their monthly payments, the lender seizes the home and sells it on the real estate market for a cheaper price. Since mortgage lenders do not want to own properties, they sell them at a cheaper price to encourage home buyers to purchase their properties. Buying a foreclosed home is very similar to buying a regular home, but you will have to make a few extra considerations.

In 2020, there were 214,000 homes in foreclosure:

Source: ATTOM Data Solutions

How Do You Buy a Foreclosed Home?

The process of buying a foreclosed home is much simpler than most people think. If you have bought a home before or have done research on buying a home, you will already have much of the information you need. However, you will have to take on a little more risk when buying a foreclosed home. You will need an experienced real estate agent to facilitate the transaction with a bank or help you with an auction, as most banks do not sell foreclosed homes directly to retail home buyers. A real estate agent can also help you with many parts of the transaction and save you money in the long run. While your real estate agent can help you, you should understand the buying process yourself before you decide to buy a foreclosed home.

Step 1: Get pre-approved for a mortgage

If you are buying the home with cash, then you don’t need to worry about a mortgage pre-approval, but for most people, a mortgage is necessary to buy a home. Before considering any type of home, getting pre-approved for a mortgage helps you with many things. For one, it helps you secure things like a mortgage rate and mortgage term. However, the primary benefit is that you secure a budget. By prequalifying for a mortgage, not only do you verify that you are eligible for a mortgage, but you’ll receive a mortgage amount, which you can use as a maximum home price. This way, you’ll only consider homes within your price range and you’ll know exactly how much you can afford given your financial situation. It’s also useful because sellers are more comfortable when buyers have guaranteed financing. If the mortgage lender who owns the property knows that you are already pre-approved, they’re more likely to sell to you.

While you will be buying the foreclosed home from a specific mortgage lender, you can choose any mortgage lender you want for the mortgage itself. Generally, you should compare different mortgage APRs and find the best lender.

Step 2: Hire an Experienced Real Estate Agent

Unfortunately, most mortgage lenders do not sell foreclosed homes directly to home buyers. Instead, they give their properties to Real Estate Owned (REO) agents that sell the properties through standard real estate agents.

You want to find a real estate agent that has experience with REO homes and knows the local area well. They can help you with the search process, the buying process, negotiation, inspecting, and anything else related to the transaction. They can also help you with any county or state-specific regulations because of their experience. In most cases, hiring a real estate agent can save you plenty of time and money down the road.

Step 3: Look for Foreclosed Homes Available for Sale

Now, you can start looking for foreclosed homes available in your target area. A real estate agent can help you search for homes and negotiate prices, but you can also look for foreclosed homes yourself. There are different types of foreclosed homes and the purchase process will vary between them. Regardless, you will know your maximum budget with a pre-approved mortgage, but you should make sure that you have enough money left over for inspections, closing costs, insurance, property taxes, repairs, etc.

Your real estate agent should know where to look for foreclosed homes, but if you want to look on your own, you can look through online listings, local newspapers, or your local city hall/court.

At this stage, it’s important to make competitive purchase offers. While foreclosed homes are generally much cheaper, lenders may reject purchase offers that are too low. A real estate agent can help you determine a good purchase offer based on the information for your local area.

Step 4: Pay for a Home Inspection

Unfortunately, when buying a foreclosed home, you take on a certain amount of risk in regards to the quality of the property. This is because you are purchasing the home as-is, which is how the previous owner left it. The lender selling the home will not pay for any repairs, so this is your responsibility. You may even need to take out a separate home improvement loan depending on the severity of repairs needed.

To understand the extent to which the home needs to be repaired, you should pay for a home inspection. After you submit a purchase offer for the home, there is a period where you can arrange for home inspections before closing on the sale. A home inspection, which typically costs $400-$800, can uncover many problems and even change your mind about purchasing a property. During an auction, you will not be given the opportunity for a home inspection. This considerably increases the risk of buying a substandard home, so you should have significant experience with home repairs. Otherwise, it’s best to avoid foreclosed homes that do not allow for inspections.

If you are planning on using a mortgage, then you will also need to get the home appraised. This is a process where the property is assigned a fair price. Lenders require home appraisals before giving you a mortgage to ensure that they are loaning you the correct amount.

Step 5: Finalize the Transaction

Once you’re sure that you want to purchase the property, read the inspection and potential appraisal results to understand the costs and price. You will then have to contact your mortgage lender and real estate agent to finalize the deal. Since the home is purchased as-is, you will need to do a couple of extra things as well.

You will need to perform all necessary repairs to meet housing codes. Nearly all repairs needed should be listed in your home inspection report. Once you’ve finalized your deal and made any necessary repairs, you can move into your new home.

Types of Foreclosed Homes

Generally, foreclosed homes can be put into three categories and it’s important to understand their differences:

1. Auctioned Properties

In an auction, banks and lenders will sell their homes at auctions to get the best price available as quickly as possible. Generally, homes sold at auctions are cheaper than those sold directly by lenders, but auctions may require you to have cash on hand. You may also not get the opportunity to arrange for a home inspection or appraisal and will have to take the house as-is at the final price. This means that you will be taking on a large amount of risk with both the quality and fair price of the home.

2. Real Estate Owned (REO) Properties

Real Estate Owned (REO) properties are sold by banks and lenders in the real estate market. These homes have already been auctioned but were not sold. Since the lender is unable to sell the property, they retain ownership and attempt to instead sell the property directly to home buyers.

Banks and lenders will typically hire REO agents that sell the properties to regular real estate agents. You can submit purchase offers directly to a bank or lender, which will typically take a long time and the home might be more expensive. But with this option, you take on much less risk because you can arrange for a home inspection and appraisal before purchasing the property. If you are unhappy with the results, you can choose not to buy the home.

3. Government-Owned Properties

Government-owned properties are very similar to those owned by banks and lenders, but the homes were previously financed by government-insured mortgages. If this is the case, a government agency or government-sponsored agency will take possession of the property and sell it through auctions and their own channels.

Pros and Cons of Buying a Foreclosed Home

If you’re still having trouble deciding whether or not buying a foreclosed home is the right decision, you should weigh the pros and cons. Buying a foreclosed home is cheaper than buying a regular home, but you need to determine if it's worth the added risk.

Pros

  1. Lower Prices: Foreclosed homes will always be cheaper than similar homes because lenders are trying to get rid of the properties as fast as possible. They are trying to recoup some of the money they lost from the previous owner defaulting on their mortgage.
  2. Clear Title Transfer: A regular home purchase from the previous homeowner may face certain obstacles like back taxes or liens, but with a foreclosed home, you are buying it from a lender who can remove any of these restrictions. Known as a “clean title”, this removes any chance that your ownership could be challenged.
  3. Faster Negotiation: Lenders are trying to sell the property as quickly as possible, so if you submit a reasonable purchase offer, they are more likely to say yes. If you choose to buy a foreclosed home at an auction, the sale is instantaneous.

Cons

  1. Extensive Repairs: Foreclosed homes are sold “as-is”, which means they usually have not been properly maintained by the previous owners. You will probably have to spend a large amount on repairing the home and bringing it up to housing codes.
  2. Inspection Fees: You should arrange for a home inspection if possible. This will ensure you understand the property condition before purchasing it. However, home inspections can cost anywhere from $400-$800.
  3. Redemption Periods: Even if a home is in foreclosure, states will give homeowners the chance to catch up on their bills and reclaim the property within about 6 months. This means that some listings will be revoked.
  4. Squatters: Homes can be foreclosed and therefore unoccupied for years. This means that people often referred to as squatters can live in the home and need to be legally evicted. This process could take months and thousands of dollars.
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