It’s late at night and you’re hours into scrolling through every home listing website on the internet. Finally you find a home you like within your budget — but it’s foreclosed. Did you just strike gold or is buying a foreclosed home more trouble than it’s worth?
To help you decide how to proceed, let’s examine how foreclosure works and what the pros and cons of buying a foreclosure are.
For a home to become foreclosed, the homeowner must fail to make their mortgage payments. When this happens, the bank or mortgage lender can seize the home, as the homeowner agreed to use the home as collateral when they took on the loan. If the lender isn’t able to sell the home at a foreclosure auction at an amount that covers the remaining mortgage payments, then the lender takes over ownership of the property.
Banks and mortgage lenders don’t like to keep foreclosed properties for long, as doing so doesn’t make them any money. Because of this, if the house fails to sell at auction, they will put the home on the market in an attempt to sell it and recoup as much of the remaining mortgage as possible.
Foreclosure is generally a lengthy process and it takes time for the lender to repossess the home. Alongside unpaid mortgage payments, unpaid property taxes also lead to foreclosure.
Whether or not you’re going to get a steal of a deal on a foreclosed home depends greatly on where the home is in the foreclosure process.
There are three stages of foreclosure: pre-foreclosure, auction, and post-foreclosure. Buyers can purchase the home during any of those stages; however, who you buy the home from changes throughout this process.
If you buy a home that is in the pre-foreclosure period, you will buy the home from the homeowner and they will be able to avoid foreclosure. If you buy the home during the next two stages, then you will purchase it from the bank or mortgage lender.
There’s no reason to believe that a foreclosed home is a bad one. Just because the homeowner struggled to pay their mortgage or property taxes does not mean the property is necessarily unfit in any way (although it can be).
Where foreclosure causes problems for buyers is the amount of time it takes to buy a foreclosed home. When you purchase a home directly from a homeowner, you can wrap up the process in just six to eight weeks. With foreclosed properties, that timeline is much longer and it can take six months for a year to close on the home, because in some states owners have a few months to buy back the home after foreclosure.
Another issue you will run into is that you must purchase foreclosed properties “as is,” which means even if a home inspection reveals repair needs, the owner (now the bank or lender) won’t make repairs. While plenty of foreclosed homes are in good condition, some homeowners struggling with their finances may have let maintenance slip, so it’s important to have some money set aside to make these repairs yourself.
Before you dive in and make an offer on a foreclosed home, take some time to consider both the benefits of buying a foreclosed home, as well as the disadvantages.
Whether or not a foreclosed home is a good fit for you will depend a lot on your budget, your willingness to be flexible when it comes to repairs and timeline, and whether or not you actually fall in love with a foreclosed home. Take some time to weigh the pros and cons of buying a foreclosed home so that way if you do find one you want to buy, you know what you’re getting into and how you want to proceed.
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