The basics of purchasing and financing a foreclosed home—for your own use or as an investment.

A hot housing market has left many homebuyers empty-handed. Outbid time and again, some are considering homes in foreclosure.

It may seem opportunistic to seek homes that are for sale because someone could no longer afford the mortgage, but foreclosures have been part of real estate transactions almost as long as home loans.

In 2020, the housing market nationwide saw a dip in the number of foreclosures. The decline was in large part due to mortgage forbearance plans put in place in response to the pandemic crisis. Many analysts expect that the number of foreclosures in 2021 will go up but not as drastically as we saw after the 2008 housing crash.

If you’re considering the purchase of a foreclosed home, here are some basics on financing and the factors at play.

Mortgages are available for foreclosed homes

While some folks pay cash for foreclosed homes, two additional financing options are available. A home in good shape may qualify for a traditional mortgage, while home in need of extensive repairs could be purchased with a construction loan.

Understanding short sales

Long before the home goes into foreclosure, a homeowner knows they’re delinquent on their mortgage. In the pre-foreclosure phase, some homeowners try to sell the home on a short sale. This is when the home is sold for less than what’s owed on the mortgage. The bank holding the loan must agree to accepting less than what they’re owed.

Bank-owned properties

When foreclosure is complete, a lender owns the home and the property is then referred to as real estate owned (REO). A bank may list the property on their own website or with a real estate agent, or sell it at auction.

Government-owned properties

Government programs like HUD, Fannie Mae HomePath and Freddie Mac HomeSteps each list their homes for sale online.

It can be tedious to comb through the bank and government agency listings, but you might find a home that’s right for you.

Buying foreclosed homes requires grit
Buying a home in foreclosure requires more grit and resilience than with a traditional home sale. That’s because there are more factors at play. Here are some things that could upend your plans:

• It’s possible that the homeowner comes up with the cash to get current on their mortgage and stops the foreclosure process.
• If you’re financing a home bought on a short sale, the original lender may take a long time to agree to the sale and your rate lock might expire.
• Homeowners who can’t afford their mortgage often can’t afford repairs either; the house could be in bad shape. Also, some people are bitter about foreclosure and damage the home or remove things that should remain, like a furnace, for example.
• A vacant house is susceptible to vandals. It’s not unheard of for a home to be stripped of copper plumbing or wires and suffer significant damage.

• Others are looking for a good deal, too, and you could face competition from other buyers, including professional property flippers.

Talk to us about financing a foreclosed home

For many people, buying a foreclosed home is a viable path to homeownership or buying a home as an investment. At Consumers, we’re here to help. Our lending decisions are made locally, and we may be able to help you finance a foreclosed home with a construction loan or conventional mortgage. Give us a call at 800-991-2221 or talk to one of our mortgage loan officers.

Consumers helps more than 2,000 members finance land, first and second homes, and home improvement projects each year. We’d love to help you with a mortgage or home equity line of credit; contact us online or call us at 800-991-2221.