If you are going through the home-buying process, there will be a lot to deal with. This includes searching for the right neighborhood and property, arranging financing, and more. When you compare your options, you should consider many factors, such as the price, the condition of the house, etc. Some people prefer buying a house in good shape even if this means a higher price. Others may find it difficult to afford a perfect house, especially if they struggle financially. If you are having a hard time raising funds for a house, you might benefit from the option of foreclosed homes. Like any other option, properties in foreclosure have advantages and disadvantages that you should keep in mind when you review your options.
Why You Should Consider Buying a House in Foreclosure
While purchasing a foreclosed home can be a great way to save money, not everyone is aware of this housing option. In fact, understanding how this works can make a world of difference in the way a house purchase would affect your financial situation. This is why we created this article hoping it will help you get a better understanding of the following:
- When Does a House Go Into Foreclosure?
- What are the Benefits of Buying a House in Foreclosure?
- What are the Disadvantages of Buying a House in Foreclosure?
- Where to Search for Foreclosed Homes?
- What are the Common Types of Foreclosed Houses?
When Does a House Go Into Foreclosure?
Understanding the meaning of foreclosure is essential in order to learn how this opportunity might work in your favor as a home buyer. Generally, a foreclosure occurs when a lender seizes possession of a property. This lender can be an individual, a bank, a loan company, etc. Why may a lender take possession of a property? Typically, foreclosures take place when the homeowner (borrower) fails to make their mortgage payments.
After the property goes into foreclosure, the lender will normally want to recover their financial losses. In this case, the best option they have will probably be selling the property. This is how the property gets back to the market as a foreclosed property. They usually have lower prices compared to conventional properties, but they are listed “as is.”
What are the Benefits of Buying a House in Foreclosure?
There are multiple reasons to consider this housing option. In fact, properties in foreclosures come with plenty of benefits that include:
- Lower Prices
- Better Chance of Negotiation
- Reduced Additional Costs
When you are looking for a house to buy, there will be a few important things to consider. The price of the house is one of those things. If the price is too high for your budget, you may lose interest in the property. On the other hand, the cheap price of a property might increase the chances of you buying it. When it comes to foreclosed properties, the low price is the star of the show. It is most likely why people find this type to be a great housing opportunity. It can save you a lot of money.
Better Chance of Negotiation
Another reason why foreclosed homes are popular is the easy negotiation. Although the listing price is already low, home buyers can negotiate an even lower final price. This is due to the fact that the sellers often need the money as soon as possible. So, they usually accept a lower price to sell the property faster.
Reduced Additional Costs
When you buy a new house, you should expect to deal with a down payment, closing costs, mortgage interest rates, and other relevant costs. With the foreclosed houses option, you may find that these costs are less than usual. This means more savings on money.
What are the Disadvantages of Buying a House in Foreclosure?
So far, properties in foreclosure may sound too good to be true. However, purchasing a home that is in danger of foreclosure does have its drawbacks. It’s important to consider the disadvantages before making a decision. Some of those drawbacks include:
- Highly Competitive Markets
- Problems Within the House
- Taking Too Much Time to Make a Purchase
Buying a home in foreclosure might involve lots of bidding and the property can end up being overpriced. For many home buyers, foreclosed homes are a great catch because of all the benefits we mentioned earlier, especially when it comes to the cheap price. The lower the price of a house, the more people are interested in it. This may open the door to competition. So, you might not be the only one who is trying to get that specific house you like. It might be disappointing when another buyer offers more money for the property you want, but you should not feel that bad about it. As a matter of fact, many foreclosure deals don’t go through, so it’s worth checking back on.
It’s generally great to know exactly how much you owe for a house. This is especially important when you are planning your budget for this purchase. However, the price of a foreclosed home is not necessarily the final cost you will pay. Rather, you should expect some hidden expenses to arise throughout the home-buying process. You have to be fully aware of what additional costs you need to deal with because you will not be able to move into the house before paying them in full. Some examples of these expenses may include liens or back taxes, on top of the costs of repairs.
Problems Within the House
Another thing to expect with foreclosures is the unexpected. Buying a home in its current condition means taking on a number of unknowns. If a homeowner is facing foreclosure because they default on their mortgage, this probably means that they don’t have enough resources to keep the property in good shape. So, your biggest issue is probably going to be expensive maintenance. Plus, you’ll likely have to take care of a few minor repairs.
Taking Too Much Time to Make a Purchase
If you are going to purchase a home in foreclosure, you will need to be patient. The process of buying a home of this type can be full of a wide range of potential obstacles. Most foreclosures are boring and take a long time because they involve a lot of paperwork. Also, if there is extensive damage to the home, that might potentially add more time to the process. This is because the appraisal value will be low. If your home’s appraisal comes in low, you may have more difficulty receiving a loan.
Where to Search for Foreclosed Homes?
Use Google to search for listings of foreclosed properties if you are not sure where to look. The best place to look for this kind of property is online. Online multiple listing service (MLS) websites may appear when you begin looking for foreclosed properties. These websites are fantastic to find listings.
Some people would rather work with a professional when it comes to real estate than handle everything themselves. If this describes you, consulting a local real estate agent would be a wise move. Generally speaking, they are aware of the foreclosure listings available. They can also offer you the ideal guidance and assist you with the home-buying process.
What are the Common Types of Foreclosed Houses?
Properties in foreclosure don’t have only one form. In fact, there are five common types of foreclosed homes that you may find during your search. Each of these types of listings has a different process. They include:
- Pre-Foreclosure Homes
- HUD-Owned Homes
- Auction Homes
- Bought From the Bank
- Short Sales
When exploring the available foreclosure listings, you will most likely come across “pre-foreclosure homes” listings. These properties might be an excellent opportunity for you. This is because their owners need the money urgently to pay back their home loans. Home buyers can benefit from this situation.
Generally, the lender files a notice of default before a residence goes into foreclosure. The borrower now receives a letter informing them that the foreclosure procedure will soon start. The period before the house is auctioned is referred to as the “pre-foreclosure phase” in this situation.
You may not be aware that the U.S. Department of Housing and Urban Development (HUD) is selling homes. If you need help finding such homes, you can visit the HUD website. The federal government itself becomes the owner of a home purchased with a federally guaranteed loan, such as an FHA loan, instead of the lending institution. Once the government (through HUD) acquires the property, it can be sold through brokers approved by the government. You should get in touch with one of those brokers if it seems like something you could be interested in.
Before a property goes officially in foreclosure, there is usually a grace period during which the borrower should pay back their loan. If the borrower still hasn’t paid the mortgage in full after being given a grace period, the property will go into foreclosure. After that, the sheriff’s office will hold a public auction to sell the property. The auction will be promoted by signs placed across the city. Typically, these auctions take place in front of a government facility. They can also take place in other settings. With the debt in default, the proceeds from this sale will go to repay the lender what they are due.
Bought From the Bank
If you want to avoid the hassle of an auction, you may consider purchasing the home directly from the bank instead. The bank offers a particular type of foreclosed property that is known as real estate owned (REO). A property is classified as REO when it returns to the bank. This will only happen if the auction ends without a buyer.
Last but not least, short sales can be a fantastic opportunity for you. You can come across “pending bank approval” postings when hunting for foreclosed houses. These homes are available because of short sales. Unfortunately, some people don’t understand what a short sale means. When the buyer and seller agree on a price that is lower than the remaining mortgage balance, a short sale takes place. You might think that a borrower has to be already in default in order for a short-sale agreement to go through. However, this is not necessarily true. For a short sale to be approved, the borrower must provide documentation demonstrating their financial difficulties. Examples of proof that a borrower can offer include lost income or an inability to find employment.
You’ll find that a short sale process can take more time than a conventional house purchase process. Furthermore, a short-sale contract may include terms that are different from that of conventional contracts. Aside from that, the process is the same as the traditional one.
In a Nutshell
Purchasing a home is often expensive. So, if you want to save money, you can think about buying a foreclosed home. First, you must understand that you’re going to buy it in its current condition. As a result, you might have to cover the cost of maintenance and other costs. You can look online or ask a real estate broker for assistance if you wish to purchase one of these properties. There are several listing varieties available, so be sure you understand how each one works before making your final decision.