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Purchasing a foreclosed home can be a very smart financial choice right now. There are many great homes on the market that are available at very low prices due to the fact that the economy has forced their owners into foreclosure. If you can locate the funding to purchase one now, you could be making an investment that will bear a lot of financial fruit in the future. You want to make sure that you know all that you need to know before venturing out into this deal, though.

Understanding how to find funding, which questions to ask during the process and what steps (such as a home inspection) are things that are fundamental to making a smart choice in buying a foreclosed home.

Financing to Buy a Foreclosure

You probably don’t have a stack of money sitting in the bank, or tucked under your mattress, to buy a foreclosed home. You will have to get financing to purchasing a foreclosure. In fact, more initial capital may be necessary with a foreclosed home than with other house purchase. This is because of the fact that you need to reinstate the loan that has foreclosed with the bank.

Essentially, this means that you have to pay a portion of the home purchase price (usually between $10,000 and $15,000) to the lender up front to put the home back in positive standing with the bank. Additionally, you have all of the normal costs associated with buying a home such as the closing costs. To pay for these, you need to locate funding.

Here are some of your options to obtain that financing:

Visit your mortgage lender to see if you can pre-qualify for a loan. If you are in good standing with your existing mortgage lender (or the bank that you have used in the past for loans) then you might want to try to pre-qualify for a loan. You would submit your application providing information about your financial status. If a pre-qualified loan is approved then you are in a very good position to get the loan that you need to pay for the home foreclosure that you wish to purchase.

Use your own home equity. If you already own a home and are purchasing a foreclosed home for investment then you may be able to use your existing home equity to fund the new purchase. This depends upon the specifics of your own financial situation but is worth looking into if you’re a homeowner.

Assume the seller’s loan. In some cases, you can actually take over the loan from the person who is giving up their property. If you catch a seller right before foreclosure takes place then this is ideal. They want to avoid going into foreclosure and may be willing to offer you better terms of the sale if you take over their loan. This will involve submitting an application to the lender that they are currently using for the loan.

Private loans. If you can’t obtain a traditional loan but still want to invest then you can look into private loans. Using a social lending site or assistance from a well-off friend is one way to fund the purchase of a foreclosed home. It’s typically best to go with a traditional bank loan but this can be a last-resort option.

Important Questions to Ask

As you go through the process of funding and purchasing a foreclosed property, make sure that you ask a lot of questions. These questions will help you to guarantee that the purchase that you are making is a good one.

Is the property already in foreclosure? As mentioned above, you may be able to get a better deal on the sale of the home if you take over the loan of a property that is in pre-foreclosure rather than being one that’s already foreclosed. Ask about the status of the owner’s mortgage.

Does anyone live in the house right now? In some cases, the tenants of the foreclosed property have not yet been evicted. This can create some serious hassles that you might not want to deal with. Make sure that this isn’t the case or that you know how to handle the situation if it is.

Are there any liens on the property? People who had trouble paying on their home mortgage and ended up in foreclosure may have other outstanding liens on their property, which you would have to deal with as a new owner. You can ask them about this or you can look it up yourself because this is a matter of public record. A call to the county recorder or the owner’s title office should clear up this important question.

What should you know about the neighborhood? You don’t want to purchase a bank owned property that is in a bad neighborhood or one that could be bad in the near future. This is obviously true if you’re planning to live there since you want to be safe. However, it is also true even if this is an investment property. As home values rise, values are going to go up more in areas where the neighborhoods are better so you’ll get more return for your investment by shopping for low-priced bank owned homes in a decent or good neighborhood.

Does your realtor have experience with REO properties? You will get the most for your money if you work with a realtor who already has experience in helping people to purchase foreclosed homes.

What are the total costs of this purchase? Make sure that you are clear about all costs including closing costs and other fees. Make sure that you understand your financing options (as discussed above) and that you will be able to make the necessary payments on the home to keep it from going back in to foreclosure.

What types of repairs are needed? It doesn’t hurt to ask this important question. Ultimately, you’ll want to get a full inspection done to double check the answer that you’re given but asking will at least be a good start.

Don’t Skip the Inspection

Many people get the urge to skip the house inspection when they purchase a foreclosed property. They want to save themselves a little bit of money. Plus, they figure that this is a home that’s going to need some fixing up anyway so they don’t need to get the details now. That’s an error in judgment. It’s very important to get a home inspection before you agree to the purchase of a foreclosed home. You may be willing to buy a fixer-upper but you still need to know exactly what you are getting into before you buy a home. Make sure that no major repairs are needed or that you understand the full cost if they are. Specifically look at structural problems (such as roof damage) and the need for kitchen renovations (which tend to be the priciest home renovations).

You want to choose a home that is affordable now but also one that won’t drain you financially as time goes on. Buying a foreclosed home can be a very smart choice but it’s not one that you should take lightly. Ask a lot of questions, get good financing and follow all of the normal precautions that you would take when buying a new home.

Know more on Foreclosure listings.

Purchasing a home, whether it’s a traditional transaction or an REO sale, involves more money up front than just the down payment. The sum of these fees are called closing costs. Closing costs usually range between 3% to 6% of the purchase price of the home and are always on top of the price of the property.

Closing costs can be broken into three categories of fees. The fees that a borrower may incur during the closing process can be divided into three categories:

• Lender fees
• Third-party fees
• Prepaid costs

Lender Fees. Lender fees are the fees that lenders charge to process, approve, and make the mortgage loan. Examples of these fees are origination and application fees.
A mortgage application fee is what the lender will charge you for doing business with them. This fee is usually non-refundable. There are cases where this fee is waived, but that would be entirely up to the lender.

There’s also a mortgage origination fee. This is a fee that lenders charge to ‘start’ the loan process. Most lenders charge 1-2% of the loan. So, for example, a loan of $100,000 may cost you a mortgage origination fee of $1,000. This fee is negotiable if your loan is being processed through a mortgage broker. However, when dealing with an REO or bank owned purchase, this fee is usually not negotiable.

Third-party Fees. These are fees that the lender will incur from outside sources and later pass on to the borrower. Some third-party fees include:

• Document preparation fee
• Loan underwriting fee
• Tax service fee
• Notary fee
• Wire transfer fee

Many of the above are called ‘garbage fees.’ In order to avoid paying extra fees, ask your lender for a Good Faith Estimate of what you expect to pay at closing. This estimate should outline everything you could be charged for. You can monitor this estimate for changes in the weeks leading up to closing.

Prepaid Costs. These are costs collected at closing such as:

• Homeowner’s insurance – Usually, the entire first year’s premium is paid at closing.
• Prepaid interest – This is due to the lender on the date that the funds are dispersed.
  Real estate taxes

Remember that some of these fees are not negotiable when purchasing an REO property. Visit GoHoming.com, where you can find great deals on REO homes and where all fees are displayed.

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