Article from PolicyGenius.com. Author: Jeanne Lee
Updated September 18, 2020: Would-be buyers of foreclosures might feel intimidated by all their complexities. Don’t you have to pay all cash? Can’t you only get a mortgage from the bank that’s selling the house? Can you get financing at all if the place is run-down and in disrepair?
ICYMI, make sure to read this guide on shopping for a foreclosure. (external link)
Sheer confusion about financing can discourage people from exploring distressed properties if they don’t have boatloads of cash. In reality, many foreclosures and short sales are purchased with mortgages. You may even be able to finance the purchase and the cost of renovations under a single loan.
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Don’t you have to pay cash for a foreclosure?
First, let’s clear one thing up.
No, not always. It depends on what stage of foreclosure the property is in: preforeclosure, auction or bank-owned. In the preforeclosure stage, the house can be sold through what’s called a short sale. The bank-owned stage is when the lender has taken possession of the property and is trying to sell it.
With short sales or bank-owned (also called real-estate-owned or REO) properties, you can finance the purchase with a mortgage. In fact, it’s common to do so. Wells Fargo says approximately 60% of its foreclosed homes are purchased with financing.
Getting a mortgage can sometimes be trickier with foreclosures. Short sales — when someone sells a house for less than is owed on the mortgage — can take a long time to complete. They require the mortgage lender to agree to accept less money than it is owed on the home loan. You might wait months for a bank to approve a short sale. Meanwhile, your interest rate lock could expire. Or the deal could fall through because the owner scrapes up the money they owe and stops the foreclosure process.
It is at foreclosure auctions that paying in cash is usually the rule.
“If a consumer wants to bid on a house that appraised at $400,000, they’ll have to bring cashier’s checks in increments of $100,000,” says Philip Boroda, director of REOs and foreclosures for Coldwell Banker in Los Angeles. Seasoned investors who purchase multiple properties might get different treatment. Boroda says he has noticed that investors who win a bid sometimes get extra time to bring in money.
The rules for auctions vary by state and county. For example, if you are the winning bidder for a $100,000 house in Lorain County, Ohio, you’d need to immediately hand over a cashier’s check for $5,000. You’d then have 30 days to bring a bank check for the remaining $95,000.
If you were to miss the deadline, interest would start to accrue on the balance at a relatively high rate of 10% a year. Worse, you could be held in contempt of court.
Fortunately, you only have to worry about these stringent rules for cash purchases with foreclosure auctions. For buyers who don’t have buckets of cash on hand, and are looking at bank-owned homes or short sales, here are six options for financing a foreclosed house.
1. Buying a bank-owned home with a conventional mortgage
Foreclosed homes are often in terrible condition. It can be difficult to get a mortgage for a house that has been left vacant, damaged by the previous owners, or robbed of copper plumbing by vandals. Banks typically won’t lend on a house with a hole in the roof or a missing furnace.
Homeowner’s insurance — a requirement for closing on a mortgage — can be costly for an REO property that’s in bad shape. Insurance companies charge higher premiums for the additional risk involved with homes that are older or in disrepair, and it’s common for that to be the case with foreclosed houses.
But REO properties that are basically livable, even if they need sprucing up, can be purchased using a conventional mortgage from a bank, credit union or mortgage lender. As with regular houses, lenders evaluate the borrower’s credit, income and ability to repay the loan according to underwriting standards set by government-backed mortgage giants Fannie Mae and Freddie Mac.
Loan amounts go up to $484,350 in 2019. Some expensive locales have higher allowances.
When financing the purchase of a foreclosure, it’s especially important to get preapproved for a mortgage early in the process. That way you’ll be better prepared to make a serious bid as soon as you find an attractive property, before it’s snapped up by cash-flush investors.
Our partner ConsumersAdvocate can help you shop around for a mortgage. Note: We may receive compensation when you click on the link below.
Experts advise getting preapproved for a mortgage from the bank or lender selling the REO.
“They can’t force you to use their lender — it’s illegal. But they do trust their lender and don’t want to waste time with an unqualified buyer, so they want to run you through their internal system,” says Keith Watts, a real estate agent and short sale expert in Orange County, California.
You’re free to shop around with multiple mortgage lenders for the best pricing and terms, but it’s worth finding out the rate they’re offering.
“They might like it if you get the mortgage from them too, but they can’t insinuate that you’re not getting the deal if you don’t go through them,” Watts said.
Keep reading this referenced article here …
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