Last Updated on January 31, 2023 by Luke Feldbrugge
Are you thinking about buying a foreclosed home? Encouraged by the popularity of television home renovation shows? Many people eagerly jump into foreclosed properties without understanding all of the pros and cons. Let Homes for Heroes help you understand what to expect with a foreclosed home.
Six Things to Know About Bank-Owned Properties Before You Buy
A foreclosure home, also called bank-owned and real estate owned (REO), is a house that the lender holds because the previous owner failed to make the mortgage payments and defaulted on the loan.
These properties give buyers an excellent opportunity to purchase a house in a neighborhood that might otherwise be out of their price range.
Potentially getting a home below market price is a significant benefit of buying a bank-owned house. Foreclosures are priced based on the value of similar homes in their area, minus a deduction for substantial problems. A lender is motivated to sell the property quickly and will decide on a price that attracts buyers.
There are numerous loan programs available to buyers interested in purchasing a foreclosure. A Homes for Heroes mortgage specialist will help inform you of your options and guide you to the most appropriate loan type to fit your finances. Some of the favorite loan programs among buyers include the FHA and VA loan programs.
An FHA home loan is an excellent option for those who qualify for the program. FHA requires the owner to move into the house within 60 days of purchase and live in it for the majority of the year. Also, the property must be in good condition before purchase.
The FHA 203 (K) loan allows someone to buy a foreclosure that needs substantial renovation because it combines a rehabilitation loan and a purchase loan into one. Once again, the FHA loans money to buyers who plan to live in the house rather than investors or house flippers.
Veterans can access a VA loan to buy a bank-owned property as long as the buyer plans to live in the house and the house is in livable condition. The VA mandates that VA loans can only apply to properties with a sound roof, mechanical system, windows, and lead-free paint. Thus, if you want to use a VA loan to buy a foreclosure, you should focus your house search on properties in habitable condition.
NOTE: The VA and FHA programs do not provide funding for investment properties.
Location matters. Location is possibly the most important thing to think about when you’re considering a property. The place is permanent. The potential value of the foreclosure depends on the sale price of similar houses in the neighborhood. For example, if the foreclosure is a three-bedroom and two-bath house in an area where similar homes sell for $200,000, it is reasonable to assume that the foreclosure will also be worth around $200,000 if it is in excellent condition.
The right location differs for different individuals. What do you want in a neighborhood? Do you have young children in school? Would you like to bike to work? Does your idea of a sublime Saturday morning involve walking to the local farmer’s market for some freshly made baked goods?
Your future happiness depends so much on living in a neighborhood that fits your needs that you should spend some time researching possible areas before you tour potential purchases. Don’t hesitate to ask a local Homes for Heroes real estate specialist for some expert advice on neighborhoods that suit your situation. Drive and walk through new communities multiple times to gather a feel for them. The internet is an excellent resource for buyers. Also, ask friends and coworkers for their opinions on where to live.
The vast majority of foreclosures will sell in as-is condition, meaning that the seller will not make any repairs and is not responsible for the shape of the house. Protect yourself by learning as much as you can about the house before making an offer.
- Hire a professional house inspector to inspect the property. A qualified inspector looks at the roof, plumbing, electrical, heating and air-conditioning, and structure. Read the report carefully. You will then know if you need to hire a roofer to make any repairs to the roof, a plumber to replace any faulty appliances, or an electrician to make the wiring safe.
- Do not hesitate to engage a structural engineer to examine any potential fundamental issues raised by the home inspector.
Renovation and Repairs
Foreclosures are usually not in pristine condition. The key to happy homeownership is to ensure that the house you buy does not require more repairs and renovation than you and your budget can handle. Small changes might need to be made. It’s essential that you understand how much work your potential purchase needs before making an offer. Consult a licensed contractor for an estimate of the possible cost of any renovations.
Once you have an estimate of how much it will cost to fix up the house, experts recommend that you add approximately 5-10% to that amount for a contingency budget. The extra money covers the cost of fixing those surprises that always pop up when you start taking a house apart during a renovation.
Smart renovators also recommend that you consider how much of a renovation project fits your lifestyle. Do you want to live without a kitchen for three months? Does the prospect of scraping peeling wallpaper from all the rooms in your new house send you searching for a painting contractor? Does the idea of getting the windows and doors replaced make you want to hop online for an extensive search? Whatever you do, make sure that you know your capabilities before you commit to purchasing a foreclosed home.
Non-Refundable Good Faith Deposit
Unlike most good faith deposits, the money you put down as a good faith deposit with your purchase offer on a foreclosed home is typically not refundable. Since foreclosed houses will sell as-is, the buyer cannot attach inspection contingencies. Be very sure that you want the house before you make an offer.
Finally, getting into a desirable neighborhood by purchasing a foreclosure is a terrific option for homebuyers. Buying a foreclosure home does come with unique considerations for the buyer, and it is essential that you receive experienced expert advice to guide you through the process.
Sign up to speak with your local Homes for Heroes specialist, with no obligation, and get your questions answered regarding foreclosed homes, the options available to you, and more information about the $3,000 average savings Homes for Heroes specialists can provide when you buy or sell a home with them.