How to buy a home in foreclosure: a buyer's guide

Homebuyers are always looking for creative ways to make their dream of homeownership a reality. In today’s market, thinking outside the box can open doors to unique opportunities. One option to consider is purchasing a foreclosure. While the price of a foreclosed home can be appealing, it’s important to understand how the process differs from a traditional home purchase.

Buying a foreclosure can offer both rewards and risks. If you’re considering this route, it’s essential to weigh the advantages, potential challenges and steps involved. Let’s explore what it means to buy a foreclosure so you can decide if it’s the right choice for your situation.

What is a foreclosure?

Sometimes homeowners struggle to make their payments. When this happens, either the lender or the local government steps in. Foreclosure is when a lender or government acquires ownership of the property when a homeowner fails to pay property taxes or mortgage payments. The lender repossesses the property to alleviate their losses.

Through the legal process of foreclosure, the lender works to recover the amount owed on the defaulted loan. Once a lender repossesses the mortgaged property, they can then resell it to mitigate this loss.

How do foreclosures differ?

Buying a foreclosed home means you are buying it “as-is.” This means you are purchasing it in its current condition. You can still get an inspection, but the seller is not obligated to make repairs. They will also not discount the price to cover any necessary repairs. Remember, the seller is a lender making up their losses on a defaulted loan.

How does this process work? First, a homeowner receives notice. The lender has not started the foreclosure, they are simply notifying the homeowner of the pending foreclosure. Then, the lender begins the process. The homeowner is given a deadline for when they must be out, and then the lender seizes the property. If the lender doesn’t need to hold the property until the market improves, they sell the property at a foreclosure auction.

What are the risks of buying a foreclosure?

Consider both the risks and rewards of buying a foreclosed home. Before discussing the advantages, let’s first look at the risks. The risks vary depending on what stage of foreclosure the property is in. These include:

• Undisclosed condition: There is no guarantee for the condition of the house. The lender is not required to disclose details about the property. Typically, the real estate agent lists a property on the MLS (Multiple Listing Service) where information about the property is shared. This is not the case with a foreclosure. Learn everything you can about the property before moving forward.

• Major repairs needed: Consider passing on a foreclosed property if it has major damage. Remember, the seller is not obligated to compensate for necessary repairs. If there is extensive damage, it may not be worth it. Calculate the cost of repair; if it’s expensive, then it may not be a good deal.

• Competition: Many investors bid cash on these homes to use as investment properties. If you are buying this as your first home, you will have to compete with real estate investors who buy without contingencies.

What are the rewards?

Despite the risks, there are several advantages to buying a foreclosed property:

• Lower prices: Foreclosed homes are often sold below market value, providing opportunities to save money.
  

• Add equity: Do repairs yourself over time and save money. This “sweat equity” can add real equity and increase profit.
  

• Less competition with foreclosed HUD homes: Sometimes a property is acquired by the Housing and Urban Development (HUD) if there is a foreclosure on an FHA-insured mortgage.

How to you buy a foreclosure?

If you are considering a foreclosure, what are the steps?

1. Search for properties: Look for foreclosure listings online or enlist the help of a real estate agent specializing in foreclosures.

2. Get pre-approved: Work with a great lender for financing and get a pre-approval letter.

3. Research the market: What are the recent sales transactions of foreclosed homes in your area? Use comparable homes to know what price you should bid.

4. Place your bid: There are several ways to bid on a home: bid in a public foreclosure auction alongside others (including investors), negotiate with the seller and lender while the foreclosure is pending (this saves a bank foreclosing expenses) or make a strong offer before the property goes to auction.

Is buying a foreclosure right for you?

Weigh your options and decide if a foreclosed property is the right move for your circumstances. Consider the advantages and risks, how the purchase works differently than a standard listing and compare costs. The right home is waiting for you!

When it comes time to finance your new home,  Solarity Credit Union is here to help. No matter where you are in the process, we make home loans simple, fast and affordable. Apply online today and start the conversation with our expert Home Loan Guides. Get moving with great rates and flexible loan terms. With Solarity, homeownership might be closer than you think.