What Do I Need to Know Before Buying a Foreclosed Home?
Buyers are often attracted to the idea of buying a foreclosed home because of the low price. First-time homebuyers may be able to get a bigger house than they could otherwise afford. However, to be prepared for what lies ahead, it’s important to understand the foreclosure process and know what the differences are between a foreclosed home and other properties.
Types of Foreclosures
All foreclosures are not the same. To understand what a foreclosure is, you should read about three different kinds of foreclosures:
- Strict foreclosure – A strict foreclosure is allowed in only a few states. In this scenario, the lender can file a lawsuit as soon as the law permits the lender to do so after the homeowner has defaulted on a loan. Once foreclosed, if the homeowner is unable to pay within the court-ordered timeframe, the mortgage holder becomes the owner and the property can be sold immediately.
- Judicial foreclosure –This type of foreclosure is allowed in all states and required in some. The process begins when the lender files a lawsuit against the borrower demanding repayment of the delinquent payments on the mortgage. If the outstanding delinquency is not paid or the borrower does not have a defense or does not appear in court, a judgment is granted by the court to the lender. The borrower is given time to redeem the property (pay the outstanding delinquency in the court ordered judgement) and if this doesn’t happen, the lender begins the process of selling the property at an auction.
- Non-judicial foreclosure –With this process, also called a power of sale, no court is needed to handle the foreclosure. The lender sends out notices to the homeowner and all required parties as determined by state law until the end of the state-mandated waiting period. The mortgage company then holds a public auction without the assistance of a court or sheriff.
How Are Foreclosures Different from Buying Other Properties?
The primary difference between buying a foreclosure and a regularly listed property is that with a foreclosure, the seller is the bank. This will impact all aspects of the selling process. The time frame is much shorter than with a traditional sale, so you need to be ready to buy with financing already secured.
When foreclosed properties are sold at an auction, cash is usually required. This may just be a larger down payment with the remaining balance to be paid by a certain date, or it could mean paying for the entire purchase up front.
In other cases, properties have already been through an auction and the bank was the winning bidder. These properties are called real estate owned (REO) and can be purchased through a real estate agent like a traditional purchase.
Another big difference is that you are buying the property “as is.” You should still get an inspection—in fact, a thorough inspection is recommended to determine what issues the property may have.