Are you considering purchasing a real estate foreclosure? Buying a foreclosed home might seem like a complicated process, but it isn't really too far removed from a typical purchase. You will need to do a few things extra, however, and there can be more risks involved.
Lots of folks research how to buy a foreclosure because of the belief they will get a fantastic bargain. In some circumstances, this is the case, but the vast majority of the time, you won't be buying the bargain of the century. Maximum Real Estate Exposure has an in-depth guide on what you need to know about buying foreclosed properties.
Let's take a look at some of the best tips for buying foreclosure properties so that you can grab a potential bargain.
Setting Your Price
The first part of how to buy a foreclosure is understanding how much you can afford. While there might be better deals to be had, you don't want to overextend your finances.
Write down your monthly expenses and income so that you can see what mortgage payments you can afford. Don't forget to add discretionary spending to your budget, to account for purchases or evenings out.
You should consider your debt-to-income ratio, as lenders certainly will. This is your gross income and expenses, including your predicted mortgage payments.
Lenders are usually looking for your debts to consume no more than 43% of your income. With a debt-to-income higher than that, your chances of approval drop significantly. Using a mortgage broker is a sound business practice on several fronts. A mortgage broker will often have access to loan programs a traditional bank cannot offer.
They can tailor something specific that works perfectly for your financial needs.
The Right Real Estate Agent
One of the better tips when buying a foreclosure is working with an agent who has some experience in this facet of the business. Hiring an experienced real estate agent when buying a foreclosed home will really help. They can guide you to a better value purchase or help you avoid a property that is too high risk for the price.
Your real estate agent can help with the state laws surrounding a foreclosure. They can make sure that you don't go wrong in the process, helping you understand what you need to do. An excellent buyer's agent will be able to point out flaws that exist you might have missed. You should expect another set of eyes that is looking out for your best interests.
It is vital to have a fiduciary in your corner, especially when buying a foreclosed property.
Mortgage Preapproval
When you buy a home, whether a foreclosure or not, getting preapproved by a lender is vital. The lender will check your credit score as well as look at your income and expenses. They will use this to work out how much they can lend to you.
Your preapproval letter will allow you to narrow down your search to only homes that you know you can afford. Sellers like to see preapproval letters, so they know you can get the financing to buy. This could make a difference if there is competition for the property, with the seller more likely to go with the better-prepared buyer.
When deciding on a mortgage offer, you should shop around. Don't simply go with a lender you have worked with before; there may be better deals on offer. Even if you get preapproved with one lender, you can still get a different mortgage if it offers you better interest rates.
Making an Offer
The way you make an offer depends on the stage of foreclosure the property is currently at. The article at Realty Times gives a detailed explanation of the three types of foreclosures, along with their respective stages. If it is in pre-foreclosure, your agent can provide the offer to the owner directly.
If the home is foreclosed and being auctioned, you will need to make contact with the organization running the auction for more information about the property. This will put you in a better position to bid when the auction takes place.
If the home has gone through auction without selling and is now real estate owned (REO), your agent can take your offer to the listing agent for the lender.
Making a low ball offer on a foreclosed home might seem like a great idea. The chances, however, of it being rejected are high. Your real estate agent should be able to advise you of an offer that stands a better chance of being accepted.
Unless you are buying through an auction, you should include a contingency in your offer that the purchase depends on the results of the home inspection. This will give you some protection if there are some significant issues with the home.
The Home Inspection
Getting an inspection when buying a foreclosure is vital. Keep in mind there was financial stress in this household. The money to keep up with the house was probably not there. There could be issues that need immediate attention before you move into the home.
When you buy a foreclosed home, the owner, whether a bank or government agency, won't take care of any repairs. You should have a home inspection so that you aren't getting yourself into a situation that will cost you a lot to resolve.
If your home inspection report contains things that need to be repaired, there isn't normally much room for renegotiation on your offer. Your contingency will allow you a way out of the deal should the inspector find too many problems.
If you are buying at auction, you won't have this protection. There isn't going to be the opportunity to have an inspection or even look around the home yourself. Buying a foreclosed home at auction is an extra risk for these reasons. Though you might get a lower purchase price, you could end up paying more in the end. It would not be advisable to purchase a home at auction with doing some serious due diligence first.
There could be liens and title defects that could cost tens of thousands of dollars to fix. When you buy at auction, you'll be taking on all of the problems associated with the property.
Final Thoughts on Buying a Foreclosure
Hopefully, our tips for buying foreclosure homes will help you buy a better property for less money. If you can find an experienced real estate agent, the process should be less daunting, and the risks reduced. While there can be more risks, foreclosures can offer homeownership to people on a more restricted budget.
It is highly advisable also to have a real estate attorney who can check the title for any defects. Getting involved in a real estate transaction can be expensive. It would be foolish to get involved in a sale that is not going to happen in the time frame you need it to. Unfortunately, depending on the type of foreclosure you get involved with, there can be issues that need to be solved first.
Follow these steps and you'll be the proud owner of a foreclosure ready to tackle any warts that exist.