Getting financing for a foreclosed home is a bit tougher than getting it for a home that has not been foreclosed on. But not that much harder.
Full Disclosure: Home Loan Mine uses affiliate links to pay the bills. Though not all links are affiliate links, many are. If you purchase or sign for something through one of them, I make a small commission. With a bit of luck, enough to buy my imaginary capuchin monkey pet a cup of Starbucks macchiato coffee. He likes them so!
There are three types of foreclosed properties and two types of borrower, each has a bearing on getting financing.
Type of Foreclosed Properties, By Seller
Some people include pre-foreclosures here. I do not. Because the homeowner still controls the property. That means, the homeowner can sell it (through a short sale), do nothing and it ends up being taken over by the lender, or catch up on payments and keep owning. I will go over financing a short sale purchase at the end of the article, though.
Auction Foreclosure Sales
Getting financing for a foreclosed home that you’re buying at auction is not a great idea. Here’s what happens.
Once lenders have taken possession of a property through foreclosure, they sale it through a sheriff’s sale. They can, but do not have to, set a minimum amount they will accept. Anyone can bid and win a bid, if they meet the rules of the auction.
The rules of the auction vary by county, but, generally, winning bidders must give, on the spot or within a very short number of days, a certain percentage of the sale price. In some places that is 10% of the winning bid amount. In some places it is higher. The best thing to do is to get familiar with the rules.
The rest of the money can be brought with 30 days (usually). That means, it is possible to get a home loan against that property.
Possible and wise are not the same thing. Depending on the type of loan you seek / qualify for and you (how organized and prepared you are), 30 days might not be enough.
Again, having the highest bid does not guarantee that you will get the property. As I mentioned, the seller can have a minimum amount they want. It is also possible that the person that lost the property is willing and able to give the lender all the money they own. Both have happened to me.
I had the highest bid on a condo in good shape. I had just appraised the unit below it for a sale at $250,000 three or four days earlier, my bid was $221,000. The unit was identical in layout and condition and materials used. I got a great deal. But the selling bank did not want to let it go for $221,000.
I won another bid, on a parking spot in an area where people were paying $170-250/month for a spot in a condo complex garage. I put the down payment on the spot and started making my calculations. I’m a greedy little bugger, so I was going to get at least $250 a month. In a bit less than two years, I was going to recoup my investment and start earning… Being blinded by greed made me forget that I still had to pay a little in association fees. Don’t be blinded by greed, or anything else.
Getting financing for a foreclosed home as an REO sale is a great idea. Here is how it works>
If a bank (lender) does not sell a foreclosed property at the sheriff’s sale, it becomes an REO (Real Estate Owned).
Eventually, it will get processed and listed for sale on the lender’s site and with their preferred real estate agent. It will then appear on MLS.
Some lenders, at first, allow only people who plan on moving into the house to bid. Then, they open it to everyone.
The pressure here is a bit less than at the sheriff’s sale but, for a good house, there can be a lot of competition anyway. It is a good idea to have your down payment ready and the loan source has all the documents they need to process your loan application. It is even better if you get yourself approved by an underwriter.
Underwriters approve the borrower and the property. Some lenders do the first without the second.
How Can You Find Out What Bank Owns A Foreclosed Property?
Glad you asked. For most counties, there are two options:
- wherever your county keeps the physical records of sales and look through the files they have
- the clerk of the county’s website.
Not all counties have this information online. Some counties charge a fee. Some take a while to update their online file. And, of course, there are mistakes. Just because you cannot find a record online, it does not mean it does not exist.
Government-owned at REO’s are properties where a Government agency backed the loan that ended up in foreclosure and the lender did not sell them at the sheriff’s sale.
You can find them on the HUD’s website. You can search by State, City, County, Zip Code and by buyer type.
They are not different from other foreclosed properties. What is different about them is that you must follow HUD’s rules for selling. Which are different than those of others, but not that different. One of them is that investors cannot bid on new listings, only Owner Occupants, Nonprofits, and Government Agencies only. But once the listing is not considered new, it is opened to everyone.
For many parts of the country, usually, there are not that many listings. Some of them, they’re for sale for $1.00, some for hundreds of thousands.
Type of Foreclosed Home Buyers
There are four types of foreclosed property buyers:
- Not-for profit organizations
- Government agencies
I am only going to cover owner-occupants and investors. Specifically, I am going to cover getting financing for a foreclosed home when you’re going to occupy the home and when you’re buying it as an investment.
How Can You Finance Foreclosed Homes?
Getting financing for a foreclosed home is different for investors than for owner-occupants. There are many options for either type, but the rules favor owner-occupied. Which, to me, makes a lot of sense.
Owner-Occupant Foreclosed Home Financing
There are several types of financing programs owner-occupants can choose, depending on where they live and their personal situation.
- Conforming conventional loans
- Government-backed loans
- Non-conforming conventional loans.
Conforming Conventional Loans for Foreclosed Homes
Most people simply refer to this type of loan as conventional loans. They are loans that Fannie Mae or Freddie Mac would buy, which is most home loans in the USA.
Depending on the condition of the property, you can get a regular conventional loan or a renovation loan. So, yes, you can buy a foreclosed home with a conventional loan.
These loans require that your credit is not too bad (middle score must be 640 or higher) and that you did not have a bankruptcy or foreclosure or deed-in-lieu in the past 4 years.
The down payment amount depends on the property type. There’s a program for 1-unit properties that requires no more than 3% but most people will have to put at least 5% down. For 2-unit properties, the down payment must be 15% (though, at times, it was 5%), and for 3 and 4-unit properties it must be 25%.
Buying A Foreclosed Home With FHA Loan Money
The same requirements apply as when buy any other home with an FHA loan. The difference here has to do with the fact that the percentage of trashed homes is higher in the foreclosure group.
Your options are:
- a regular FHA loan
- a Standard 203k loan
- a Limited 203K loan
- HUD $100 down payment program.
The minimum down payment except for the last one is 3.5%, and it can be a gift. If you’re dealing with a 3 or 4-unit property, the self-sufficiency rule applies.
The self-sufficiency rule is simple: 75% of market rents from all the units must cover principal, interest, mortgage insurance, property insurance and any other property-related insurance needed and property tax payments.
You can get a regular FHA loan if the property is in livable condition, structurally sound and poses no danger to its occupants. So, nothing must be new or in great shape.
It is the call of the appraiser if that’s the case.
If the property must have some work done, or if you want to remodel anything, you get a 203K loan. Depending on what you have or want to do, it will be the limited or standard version. (The difference is in the loan amount and type of work allowed. The limited has a max. loan amount of $35,000 and does not allow for structural changes.)
HUD $100 Down Program
Just like the name says, you put down just $100. The catch? It does not apply to all HUD-owned properties. HUD designates a property as eligible for the $100 down payment program. And it’s an FHA program in every sense with just one more difference: people qualify for it only if they have not had an FHA loan in the 24 months prior.
Buying A Foreclosed Home With A VA Loan
The VA will not guarantee a loan on a property that is valued less than its sale price. It will not guarantee a loan if the property is not safe to occupy.
Foreclosed homes are more likely, in my experience, to appraise for less than sale price or to have safety issues.
If the first one happens, you’re out of luck. If the second one happens, you can fix the problem, then have the appraiser come and see the home in the repaired state. That is a risky thing to a borrower. Just because you fixed the problems that make the house unacceptable to the VA does not necessarily mean that you’ll get the loan.
Like with the FHA loan for foreclosed properties, there’s no difference in how borrowers or properties qualify for the loan. In other words, if you could get a VA loan for the same amount on a non-foreclosed property, you’ll qualify for it for a foreclosed property. The only thing that matters then is that the property meets VA’s rules.
Buying A Foreclosed Home With A USDA Loan
Like with the other Government-backed programs, you can buy a foreclosed home if you meet its standards and if the property meets its standards.
In other words, the property cannot be within an urban environment or in a condition that is not safe for its inhabitants and you must have the type of credit and income the USDA requires.
Since the USDA loans are for 1-unit properties, all 2-4 unit are out.
Getting Financing For A Foreclosed Home As An Investor
Investors represent a higher risk to lenders than owner-occupied, so there are more restrictions placed on them. Even so, they have quite a few options, some are conventional conforming, some are not.
Conventional Conforming Investment Loans For Foreclosed Homes
Like with owner-occupied, these are loans that Fannie Mae and Freddie Mac would purchase. The advantage of these? The interest rates are lower than they are for non-conforming loans.
The two big differences between these loans and the conforming kind are:
- the higher interest rates (5.000-5.500% when confirming ones for the same type of property and same borrower would be 4.250 to 4.750%.
- the larger down payments required (15% on a 1-unit property; 25% on a 2-4-unit property).
Unlike FHA loans, there’s no self-sufficiency requirement and some properties can be purchased without a renovation loan when the FHA would force one.
The options here are:
- regular conventional loan
- renovation loan.
For many people, the most important difference between FHA renovation loans and conventional renovation loans (besides the LTV’s) is what can be done with a conventional loan. Specifically, there are no limits, you can do any structural repairs you want, and you can remodel / add luxury items too.
Non-Conforming Investment Conventional Mortgage Loans For Foreclosed Homes
These are loans that Fannie Mae and Freddie Mac would not purchase. They can be qualified mortgages or non-qualified mortgages.
Some lenders have loans just as good for you as a loan that Fannie Mae or Freddie Mac would buy, but they do not follow all the rules Fannie and Freddie have.
They do not because they do not have to. All lenders could make a mortgage loan and hold on to it. Most do not or, at least, do not hold onto all their loans. Some do.
These loans do not have risky features, so they are qualified mortgages.
Then there are the non-qualified mortgages. These have risky features, most notably, they use less than full documentation to qualify borrowers.
Among the most popular are the ones that use bank statements to qualify borrowers with. Other options are:
- qualify with assets (lenders add up your qualifying assets and divide that amount by the number of months in the term of your loan to determine your income; you may or may not have to pledge the assets). (This is also known as asset-depletion qualifying.)
- qualify based on the property current or future cash-flow (lenders take the monthly market rent and compare it to the monthly total of principal, interest, property taxes, HOA fees (if applicable) and any required insurance policy fees; Some want a ratio of 1:1.25, some 1:1.15, some 1:1 or even 0.90:1).
These loans have higher interest rates, but not as high as hard money loans.
Hard Money Loans for Foreclosures
Typically offered by private investors, they tend to have a 12-month maturity time and borrowers must have clear and realistic exit strategies in place. The interest rates are quite high, but the loans take much less time to obtain, quite often they can close within 7-14 days.
How To Get A Loan For A Foreclosed House
The short answer is like you do for any other type of property.
The full answer: shop around long before you need it. That way you’ll understand your situation and your options. And, of course, you’ll have the time to sift through the many possible lenders. Because there are quite a few and not all were created equal.
I have come across many people who are buying a foreclosed property to flip who’ve gotten stuck on the rate. They wanted the lowest rate. The lowest rate, when you take out a loan for 6 to 12 months is not as important as when you take one for 10 or 15 or 30 years. What is important is the closing costs.
There’s a point at which the interest rate is more important than the cost. That can be calculated. Easily.
Add up the interest you’d pay in 12 months to the closing costs of your loan options and compare. It is that simple.
Interest paid: $4,200 and closing costs of $4,200 is less expensive than interest paid: $3850 and closing costs of $5,300. By $950.
Alternatives To Getting Financing For A Foreclosed Home When Buying One
Though the seller requires cash, the cash does not have to be yours or a loan against the property you are buying. Or with a loan that is not your usual kind of loan.
You can get a loan against another property you own, use credit cards (works ok for low-priced properties).
Alternatively, you can buy cash, then apply to get your cash out as soon as you’ve become the owner. This type of loan goes by the name of delayed financing.
You are limited to borrow only the money you paid to purchase the property, even if you’re buying it far below value.
The advantage of this? You free up the cash fast. You can get your cash out and use it to remodel the home, then, when everything is done, you can sell the home or refinance it based on the new, as-repaired value. Or you can get delayed financing loan just because the property does not meet lender’s property quality requirements and you do not want to bother with a renovation loan.
Getting A Mortgage To Buy A Pre-Foreclosure Home
Pre-foreclosure home sales are called short sales, usually. For them to happen, the lender(s) must accept a price lower than what it is owed them.
The advantage of buying a home as a short-sale is that the owners tend not to go out of their way to damage the property. The big disadvantage is that it can take months before the closing can happen.
It is especially more difficult when there is a second loan on the house. Both lenders have to agree to accept a lower amount. But they do not work at the same speed. So, you might have one of them give you a letter stating the amount they’re willing to accept only to have that letter be deemed too old by your lender by the time the other lender provides you the letter that states what they’re willing to accept.
Which means you have to go after the first lender and get them to give you an updated letter. And other documents expire too. And, of course, interest rates can go up to where you do not want to buy the property any more.