It’s a myth that you have to pay cash to buy a foreclosed home. There are many options out there. The key is in how much you know and how much you prepare. There are certain loan programs that may prove to be a little more difficult to get because of the condition of the property. Overall, though, you can secure financing for a foreclosure.
The first step in buying a foreclosed home is getting pre-approved. This way you know how much you can afford. That’s not the only reason, though. You also want to be able to confidently bid on a foreclosed property quickly. Chances are if it is a good deal, there will be quite a bit of competition for the home. You’ll be up against not only others with pre-approvals, but also cash buyers. Not knowing what you may qualify for can leave you in the dust without a home.
You don’t necessarily have to secure financing from the lender that holds the home, but it’s not a bad idea to try. Securing financing from the selling lender gives the lender more confidence in your ability for final approval. Don’t restrict your search to just the selling lender, but always keep it open as an option.
Why Financing is Tough
The main problem with securing financing for a foreclosed home is the home’s condition. If it’s not move-in ready and considered safe and sanitary, most banks will not provide a loan for the home. This means despite your approval, you could still be without financing. Keep this in mind as you bid on homes that went through foreclosure. While you can’t find out everything, try to find out as much as you can.
Do people live in the home now? If so, how long have they been behind on their payments? The longer they have not made their payments, the worse condition the home is likely in. If they don’t have money to pay their loans, they probably aren’t caring for the home either.
If no one lives in the home currently, you have to think about crime, especially vandalism. You won’t know if the home has been invaded and/or if things were stolen. If the lender determines the home is not livable, you could lose your financing source.
In this respect, cash is the best way to buy a foreclosed home.
When Cash is King
As we stated above, cash reigns supreme when buying a foreclosed home that is in poor condition. It’s not unusual to see foreclosures in non-livable conditions. Banks sell the homes as-is, meaning they don’t make any changes to the home. You get what you get, unlike when you buy from a private seller. You may find holes in the walls, run down appliances, and non-working utilities, just to name a few issues.
If this is the case, finding financing could be difficult. This is when paying cash pays off. You don’t have anyone that must approve the home – you can buy it and do what you want with it. However, there’s one exception to the rule. It’s called the FHA 203(K).
FHA 203(K) Loan
The FHA 203(K) provides you with funds to purchase and rehab the home. You’ll have to involve a 3rd party FHA Loan Consultant who will help you determine what it will cost to fix up the home. He will also determine the mandatory changes that must be made in order to make the home livable. The good news is that you can borrow up to 110% of the ‘improved value of the home.’ This is the value the Loan Consultant and/or appraiser determines the home will be worth after you make the designated repairs or changes.
While you don’t have to pay cash for a foreclosed home, it’s often the easier route. Looking at the flip side, though, lenders have your back. They don’t want you to invest in something that is going to be a money pit. They want to give you a loan on a home that they have confidence you can afford to buy and care for. They also want to protect their own investment in the property as well though.
It’s almost like a Catch 22. Cash does get you into the property with fewer restrictions, but a loan from a bank has restrictions that could protect your investment in the end.