Before the mortgage crisis of 2007-2009, purchasing a foreclosed home was extremely difficult. Bargain hunters had to follow auctions put on at courthouses or dig through endless amounts of legal filings. The housing crisis brought a flood of available properties and made it easier to find and purchase them.
Today, the process can be very similar to any other home search. Looking to set up an alert for when foreclosures hit the market? Click here.
Can We Expect an Increase in Foreclosed Properties in the Coming Months?
In late March of 2020, the CARES Act was put into effect to provide relief to many impacted by COVID-19. This included enacting an optional mortgage forbearance period where homeowners were able to temporarily pause their mortgage payment with an agreement from their lender. It also put into effect a ban on foreclosures through September of 2020.
While the foreclosure moratorium kept getting extended, the Biden administration’s final extension of the moratorium ended on July 31, 2021. (Note: The deadline to request mortgage payment forbearance was also extended to September 30, 2021.)
A near-term increase in foreclosures is most likely to occur, however, due to new protections that have been put into place, we are unlikely to see the HUGE increase in foreclosures that some are expecting.
To help homeowners who are behind on their mortgages and facing the end of their forbearance programs, the Consumer Finance Protection Bureau finalized a new rule that will establish three main safeguards that loan servicers will need to undertake before starting any foreclosure process. The new rule will go into effect on August 31, 2021.
Purchasing a Foreclosed Home
When buying a foreclosed property from a bank, we highly recommend hiring an expert real estate agent to bargain on your behalf. Banks tend to have sizable inventories and are more inclined to negotiate on price. If you can pay for the property and renovations in cash, you are in an even better position. This is why some buyers will partner up with other investors to be able to purchase the home and pay for the renovations in cash.
Financing a Foreclosed Property
You have the option to use a mortgage to buy a foreclosed property, however, private lenders can be skittish about financing foreclosed deals. On the flip side, several government-sponsored financing options are available for buyers who qualify.
- 203(k) Loans (Rehab Mortgage Insurance): Designed by the FHA, these loans help reassure the concerns banks have when purchasing a high-risk property. Section 203(k) insurance enables homebuyers and homeowners to finance both the purchase (or refinancing) of a house and the cost of its rehabilitation through a single mortgage or to finance the rehabilitation of their existing home.
- HomePath ReadyBuyer: This program is geared towards first time home buyers and is offered by the Federal National Mortgage Association (i.e. Fannie Mae). Buyers must complete a mandatory homebuying course which then they can receive up to 3% in closing cost assistance towards the purchase of the property.
What to Expect When Purchasing a Foreclosure
Purchasing foreclosures are NOT for the faint of heart. While you usually are getting a “deal” on the property, it is important to think about the time, money, and effort it will take to get the home to be the way you want it.
In some situations, the previous homeowners will leave the home in complete disarray. You must have a good chunk of cash set aside to cover the cost of making the home livable again (i.e. appliances, fixing any damage done by the previous owner, etc.)
If you have questions as to what you should pay for a foreclosed home, give us a call. We have a comprehensive process to ensure you are making the best financial decision possible.