Are you interested in buying a foreclosed home?
In 2021, foreclosures in the United States increased by 67%, which kickstarted the process for 25,209 properties. Foreclosed homes are ones that banks took possession of after the tenant can’t meet the required payments. While it’s not the most cheerful sight to see, it opens up opportunities for those looking to buy a house.
Buying a foreclosure is more common than you’d think. There are some benefits to buying such houses that people want to reap. However, most don’t know that the buying process for foreclosures is quite different.
It can catch potential buyers off guard long enough for others to swoop in and snatch the listing from their hands. Understanding the process is vital if you want things to proceed as smoothly as they can. Read what’s below to learn all you need to know about buying a foreclosed home.
Know the Property’s Stage of Foreclosure
The key to understanding the buying process is knowing what stage of foreclosure the property is in. Properties go through five stages of foreclosure before the bank takes over. During the first two phases, you’re still not able to buy the property.
During the first stage, the borrower isn’t paying the mortgage. All is well in this stage, so long as there’s communication between the lender and borrower. This can happen when a property is underwater but is unlikely since negative equity rates went down by 12%.
The second phase happens when the borrower hasn’t paid their mortgage in three to six months. Borrowers default on the mortgage here and receive a public notice. Eviction often follows, and it’s only then that you can purchase the property.
After receiving the public notice, there’s a grace period where the borrower can pay their outstanding debt. Here, the lender and borrower work together to avoid the foreclosure of the property. They often renegotiate rates and payment conditions to help meet their debt.
If they don’t think of a good solution, a “short sale” often follows. They give up the property to pay for the default in this case. It’s here that you can step in and see what the property offers.
Approaching a property during preforeclosure gives you a lot of advantages. You have bargaining power as sellers often negotiate to sell the property as fast as possible. However, since it’s new to the market, the property may not be under market value.
The seller also provides you with all you need to know about the property’s condition. You get a background on the title history, too. It’s a great way to know what you’re in for when checking out bank foreclosed homes.
Remember that sales aren’t final until title and deed transfers are complete. Negotiating can take a long time, during which the seller’s financial situation may improve. When this happens, they can pull out of the sale altogether.
If a short sale can’t help the seller rectify the default, the lender can auction it off. The auction is a much more fast-paced buying process compared to the preforeclosure. Here, the lender sets a base price that’s often lower than the property’s balance.
What’s great about this stage is the bank often accepts cash only. The idea often scares other homeowners away, which means less competition. You can then purchase the property below market value, thanks to this.
If the auction doesn’t go well, the bank steps in and owns the property. Buying a house in the post-foreclosure stage gives you the same benefits as with the preforeclosure stage. The only difference is that everything is clearer now that the bank evaluated the home.
The titles will be more accurate and you have a full rundown on the property’s condition. You get to explore the property in its entirety, too. This way, you can gauge for yourself if any damage is worth fixing at this point.
No paperwork involving other financing options with the previous owners is necessary. You can use regular mortgage financing, and the closing period is normal, too.
It’s all like buying a regular home from the market. The only things notable are the programs banks introduce. You only need to worry about these if the property has any federal mortgage defaults.
Potential Risks of Buying Foreclosed Homes
There are certain risks involved in buying foreclosed houses in Chicago or in any state. One is the uncertainty of the property’s condition, especially during the auction phase. You’re not allowed to perform any inspection and need to buy the property as-is.
You may end up paying more because of maintenance and repair fees this way. Remember that the previous owner was already financially struggling. You can’t count on them to get most of the damages fixed before the sale goes through.
A legally foreclosed home may also have squatters. You’ll need to have them legally evicted if squatter’s rights have already taken hold. It’s an expensive legal process that can cost you a lot to resolve.
Reducing the Risks
While the risks are intimidating, there are ways for you to eliminate them. For one, you can check out the properties that have only recently gone into foreclosure. Fresh properties mean they’re less likely to have squatters living within.
You can also get a preapproved loan before anything else. Time is one of your biggest enemies when buying a house foreclosed by banks. Sellers can back out of the sale, and others may compete with you.
A preapproved loan narrows your search for foreclosed properties you can afford. By doing so, you can get the paperwork done faster, and you’ll have a budget in mind already.
Hire professionals to help you through the process, too. A real estate attorney helps you with properties auctioned off to you.
Bring an inspector with you when checking out pre or post-foreclosure homes. This way, you immediately know the condition of the property. You won’t have to wait for the seller’s or bank’s evaluations anymore.
Learn the Buying Process for a Foreclosed Home Today
Understanding the buying process for foreclosed homes can save you a lot of trouble. Streamline the process to make sure all is in order before you move into your new house. Prepare what you need and buy a house foreclosed by the bank today!
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