Have the historically low interest rates on home loans finally gotten you off the fence and into the housing marketing? Are you willing to tolerate some risk for a great deal on an existing home? Is your move-in date flexible?
If you answered yes to these questions, you might want to consider buying a home sold through a short sale or foreclosure. These types of home sales will typically cost you less than a home sold the traditional way, but they come with their own set of issues that require planning and patience.
Individuals who are interested in these properties should do some research first.
What is a foreclosure?
A foreclosure is a legal process that occurs when a homeowner stops paying the mortgage on a property. The lender notifies the homeowner of non-payment and will give the homeowner an opportunity to repay the late mortgage. If no payment is received, the home is sold through a foreclosure auction.
Buying a home at a foreclosure auction requires an experienced buyer and some tolerance for the unknown. That's because you may not be able to view the property or have it inspected beforehand, and you can't cancel the deal afterward in most cases. You may also inherit any liens on the property. Many auctions are cash-only, requiring certified funds for the entire purchase price with no possibility of financing the purchase. Many of these properties can be in distressed condition.
If a house doesn't sell at a foreclosure auction, it reverts to the lender to sell. Buying a bank-owned home, known as a Real Estate Owned (REO), could be less risky than buying at an auction and you can still usually get a great deal. But these types of sales take longer to process because the seller is an institution that isn't on a timetable to respond to your offer like it would with an
individual seller. Selling banks will typically sell the home as-is and may not be willing to make repairs.
Individuals who attempt to sell their home for less than the amount owed on the mortgage may conduct a short sale. This type of housing sale is used when homeowners can't pay their mortgage and want to avoid foreclosure, but are unable to sell for enough to pay off the mortgage balance.
Short sales are similar to a regular home sale. You submit an offer to the seller and wait for a response and possible counter-offer and agreement. Once an offer is accepted, it must then be approved by the seller's lender. Lenders of a first and second mortgage must both agree to the offer. Lenders typically decide on whether to accept or deny a short sale request based on the seller's financial situation and the market value of the home. It could be several weeks or even a few months before they respond to your offer, especially in today's housing market. If agreed to, the sale goes through the closing process.
Keep in mind that lenders may cancel a short sale at the last minute because the seller may decide to seek a loan modification, has come up with a way to pay the mortgage, or let the home be foreclosed on by the bank. Remember, the property is usually sold as is. But you can make the sale contingent upon a home inspection and then cancel the deal yourself if you don't like the results of the inspection.
Tips for buying
Everett Garnick, Mortgage Loan Consultant Manager at Travis Credit Union's Home Loan Center, says there are bargain prices to be had on properties, especially if they have been on the market for more than 60 days. "Here's what I tell people in our homebuyer seminars. Be careful—there can be extra risks," he says.