If you’re in the market for a new house, chances are you’ve considered buying a foreclosed home—even if just for a moment.
Maybe you’re hunting for an amazing bargain or relish the idea of taking on a big project. Whatever the case, we’ll cover the basics here, including how to buy a foreclosed home, and several of the pros and cons of buying a foreclosed home.
Buying a foreclosed home: How it works
When a borrower falls behind on mortgage payments, the lender can start the three-phase foreclosure process.
1. Pre-foreclosure period
The first phase is the pre-foreclosure period, which is a state-determined grace period. During this phase, the lender can reinstate the mortgage if the borrower catches up on payments.
Alternatively, the borrower can sell the home and pay off the mortgage. In this scenario, the borrower avoids the heavy blow of having a foreclosure on his or her credit profile. If the borrower is “under water” on the home—meaning the home is worth less than the amount owed on the mortgage—the borrower could apply for a “short sale.” In a short sale, the lender gets back less than the full amount remaining on the mortgage but agrees to consider the mortgage paid in full.
2. Public foreclosure auction period
If the pre-foreclosure period lapses without the loan being reinstated or the home being sold, the property will be listed at a public foreclosure auction.
3. Bank owned / real estate owned (REO) period
If no one bids or the lender is the highest bidder at the public foreclosure auction, the lender repossess the property and it becomes bank owned, also known as real estate owned (REO).
Buying a foreclosed home: Pros and cons
Like all financial transactions, buying a foreclosed home has potential pros and cons which you should carefully consider before moving forward.
- Homes in foreclosure often have less competition and interest from other buyers.
- Prices can be lower. This can happen because the risk is higher, the homeowner is in a hurry to sell, and/or the lender wants to quickly rid themselves of the headache of owning property.
- The process can take longer because more parties are involved. Multiple levels at the bank and other investors may need to approve the purchase.
- The condition of the property is likely unknown—and most foreclosed homes are sold as-is.
- Buying a foreclosed home might require a lot of cash, especially if you’re bidding at an auction. Financing for a foreclosed home can be tougher to secure.