Buying a foreclosed home can be an affordable option for cash-strapped homebuyers. However, it’s important to understand the implications of such a significant purchase before you immediately dive in. In this article, we’ll explain what a foreclosure is and how to go shopping for one.
What Is a Foreclosure on a House?
A home is foreclosed upon when the buyer fails to make good on her mortgage by paying it as agreed. The process can be time-consuming and expensive, and is never fun for the buyer or mortgage lender. Put another way, a foreclosure is a legal process by which the owner loses all rights to the property. If the owner is unable to pay off the outstanding debt or sell the property in a short sale, the home will go to foreclosure auction. If it fails to sell there, then the lending institution will assume its possession. It goes without saying that foreclosure can have a significant impact on your credit scores and turn lenders off to doing business with you in the future. Worse still, a foreclosure can remain on your credit report for seven years, making it tough to build credit.
How to Buy a Foreclosed Home
If purchasing a foreclosed home is in the cards, here are four steps you can take to help the process go smoothly.
1. Get Help From a Broker Who Specializes in Foreclosures
Some real estate brokers and agents have relationships with banks and broker the selling of the banks’ foreclosed properties, also known as real-estate owned properties. These brokers and agents will likely know the latest foreclosed homes coming on the market. You can learn more about how to find a good realtor or agent here.
2. Budget for Repairs
The bank that now owns a foreclosed home is not likely to have a record of its upkeep and maintenance. And since the previous owner (or owners) defaulted on their mortgage, there is a strong possibility they weren’t able to afford the maintenance or repairs, both big and small, that the house may have needed. It’s a good idea to have the home inspected by a professional before you buy, so you are aware of any repairs for which you need to budget.
3. Get a Pre-Approval Letter
We recommend taking a close look at your budget and reaching out to a lender to get pre-approved for a mortgage before you begin your search for a new home. Deals on a foreclosed home may go quick, and another buyer with their financing already lined up may scoop it up. Your local bank or credit union, where you already have accounts in good standing, are good places to contact about financing. However, keep in mind that it can also be beneficial to shop around for the best deal on financing. (Just remember not to apply for too many home loans at once, as this can hurt your credit score.)
4. Check Your Credit
Before you apply for a mortgage, we advise double-checking your credit so you know where it stands. You can check on your finances by viewing two of your credit scores for free on Credit.com. You can also get a free annual copy of your credit report from each of the three major credit reporting agencies — Equifax, Experian and TransUnion — by visiting AnnualCreditReport.com. Checking your credit scores and report will not harm them in any way.
Experts advise reviewing your credit reports carefully and correcting any errors as soon as you spot them. Chances are you may need to write a letter of dispute if something’s amiss. Still, the chore will be worth it — you don’t want a credit reporting mistake to hinder your ability to qualify for a home loan at an affordable rate or to slow down the pre-approval process.
This article has been updated. It was originally published September 12, 2014.