When a home goes into foreclosure, nothing about it changes. Just because the owner's loan is being foreclosed doesn't mean the home isn't financeable or worth buying. The bidding process for foreclosures, however, can present some unique challenges. In addition, when a foreclosed home is damaged, it can also be harder to finance, not because of the foreclosure but because of the physical damage.
Residence or Rehab
Whether or not you can borrow money for a foreclosure may depend on whether you intend to flip it -- rehab and resell it quickly -- or live in it. If you're buying an investment rather than a home to live in, you may find that financing a foreclosure is more challenging. Many of the best mortgage programs are available only for owner-occupied homes. Investors often purchase homes in damaged condition and at significant discounts from what their value would be if they were turnkey. Unfortunately, because the buyer will not immediately occupy the home after closing, many banks will not offer mortgages for them.
You will have more borrowing options if you intend to live in the home. As an owner-occupant, you can use the same financing to buy a foreclosed home that you would to buy a home that is sold by a traditional seller. In some cases, a foreclosed home might even be easier to finance. For instance, homes that have been foreclosed by the Department of Housing and Urban Development, which oversees the FHA-insured mortgage program, frequently come with certifications that they're eligible for FHA-insured loans.
Paying for Repairs
Foreclosed homes often need major repairs or renovations. While many lenders will overlook cosmetic problems, repairs necessary to make a house habitable can be a problem. If you are an owner-occupant, you have two good options. One is to buy the home subject to a lender-required repair reserve. A repair reserve is a special account that holds money aside and disburses it only to pay for repairs. The other is to use a loan that has a repair or renovation element built-in, like a FHA 203(k) loan. In situations where the house needs significant repair, a construction loan could be another option.
Creative Financing Options
If you can't get a traditional loan to buy a foreclosure, money is still available. One option is to use a loan that isn't tied to the property at all. A line of credit gives you access to money you can use to purchase foreclosed homes. Private lenders and hard money lenders can be more expensive than traditional bank loans, but they're another option for borrowing funds to pay for a foreclosure. Finally, you can also buy a foreclosure on an all-cash basis. While doing this ties up your money, it makes you a very competitive buyer since you can close quickly.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.