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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.

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Get Pre-Approved

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.

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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 3^rd 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.

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Negotiate a Lower Price

Sellers in a hurry to sell their home may be willing to cut you a discount. The fact that they don’t have to wait for your bank’s approval is worth its weight in gold. Financing can slow down the purchase process by weeks, or even months in some cases. If the seller knows they can close on the desired date without worry, they’ll usually jump at the chance. This gives you greater negotiating power, allowing you to pay a lower price for the home.

Pay Fewer Closing Costs

Closing costs can easily add up to 6% of your loan amount no matter which lender you use. On a $300,000 loan, you could pay as much as $18,000 in closing costs. This is separate from any money you put down on the home too.

Cash buyers don’t have nearly as many costs to pay. There aren’t any lender fees to pay, which can save you a lot of money right there. A sampling of the costs you may avoid are:

Origination fees

Discount points

Underwriting fees

Application fee

Credit reporting fee

Escrow fees

You also won’t have to set up an escrow account for your real estate taxes or homeowner’s insurance. This can save you thousands of dollars.

In fact, you won’t even have to pay for an appraisal. Mortgage lenders require an appraisal to make sure the home is worth enough for them to fund a loan. When you pay cash for the home, the risk is yours. It’s up to you if you want to pay for the appraisal or not. They often run around $400.

Lastly, you won’t have to buy title insurance, at least for the lender. When you take out a mortgage, you are required to pay for title insurance to protect the lender against any issues regarding ownership in the future. Most buyers also purchase an owner’s policy. It’s up to you if you want to pay that expense though.

Win a Bidding War Faster

Sellers often pay more attention to cash buyers than those with a mortgage. As stated above, financing can slow the process down or even kill it altogether. When you pay for the home yourself, you don’t have those worries. This can work in your favor if there is a bidding war on the home. When several people want the home, they will often do whatever they can to sweeten the deal. This usually means outbidding the other buyers. But sometimes money doesn’t do the trick. You may even bid a lower amount, but offer to pay cash. Sellers often jump at this opportunity.

You Can’t Lose the Home

Finally, when you pay cash for a home, it’s no one’s collateral except your own. There isn’t a lender that can take the home from you. When you take out a mortgage, your home is collateral. If you miss too many payments, the lender can start foreclosure proceedings on your home. When you pay for the home upfront, though, there aren’t any worries of this happening.

Paying cash for a home isn’t for everyone. Obviously, you need a lot of money to do so. If you have it though, it can benefit you now and in the long run. If your money is sitting in an account not making very much interest, it may make more sense to pay for your home all at once. This way you have 100% equity in the home. Should something happen down the road, you could sell the home and get your money. It’s a win-win situation for you!

Do You Have to Pay Cash to Buy a Foreclosed Home?