Foreclosures, a Deep Rabbit Hole
One of the most common questions I get asked by buyers, especially first-time buyers, is “what about looking at foreclosures?” Flippers and investors are not who this post is for. I want to clarify that I’m directing this toward those people who DO NOT have lengthy experience gutting and renovating homes. Investing in foreclosures can work well for those who have the knowledge, know-how, and financial capabilities. But for the average home buyer, I do NOT recommend looking at foreclosures.
And here is why…
First, 95% of foreclosures are in a state of disrepair. This requires extensive renovation which can cost thousands, if not tens of thousands of dollars for the buyer. Typically, foreclosures are bought by investors that can pay in cash, or at least put a minimum of 20-25% down on a conventional loan. As a result, if a house’s condition cannot pass appraisal inspection, it will not qualify for a loan. Which means the only way it can be bought is with cash.
Second, many foreclosures may not qualify for an FHA or VA loan due to the fact that the homeowners who walk away from their homes cannot afford to make their house payments. Therefore, they cannot likely afford to make any repairs (such as broken windows, doors or severely torn carpet.). However, sometimes the bank will offer concessions to meet loan approval. Keep in mind that when the bank must offer certain concessions to get the loan approved; the cosmetic condition of the house will likely need renovated. This could mean paint & carpet when you move in, which can be a huge out-of-pocket expense!
Furthermore, while competing with 4 or 5 other offers for a deal on a foreclosure home, you may be losing out on other great move-in-ready homes as the only competitor if you act quickly!
Most everyone that I work with needs to get a loan. There are 3 main types of loans that buyers get: FHA, VA, or Conventional. There are a couple others out there, such as the Native American loan – a great option if you are registered with a tribe. The FHA 203k Renovation Loan which isnot as great as it sounds for a first–time buyer. It is better for investors that have experience renovating homes with a quick turn-around time. Unless you or your spouse are current or past military in good standing, you will not qualify for the VA loan. If you will need some down payment assistance, you are most likely going to need to go the FHA route, since there aren’t many DPA programs available for Conventional loans.
(HOWEVER… If you or your spouse have any immediate family members that are current or past military in good standing, there IS ONE OPTION for a Conventional loan that will allow you to finance up to 100%. I.E.- no down payment. If you do have any family members current or past military, definitely let me know! I just may have the perfect loan program for you!).
That being said, FHA (and VA) appraisal inspections are a little more strict on the condition of the property than a Conventional loan. When looking at foreclosures, most of these properties are either not up to code or need extensive. As a result, they may not qualify for an FHA or VA loan. That means the buyer will need to look for homes that are mostly move-in ready and don’t need much renovation.
The Waiting Game…
As a result, buying a foreclosure can take anywhere from 2-18 months. Furthermore, it will usually require the buyer to pay for an inspection prior to submitting a contract. There is a possibility of the deal falling through half-way into the process (or right before closing) due to the bank changing their decision to sell.
On occasion we do come across a fairly decent foreclosure that needs little work. In addition, we hear stories from people who had a good experience buying a foreclosure. But I can definitely say that is few and far between.
Here’s a link to read more about the FHA 203k Renovation Loan: http://www.bankrate.com/finance/mortgages/mortgages-pay-home-renovations-1.aspx