How to Finance a Foreclosed Property

Get pre-approved for mortgage. Next, look into 203(k loans.

Preparation is key to financing foreclosed properties. If the property is in good condition and you have good credit, it could work as a traditional home purchase. The home’s condition, as well as whether it will be used as a primary residence or as an investment, can all influence the loan approval.

First step: get pre-approved

If you are going to need financing, it is a good idea to start talking with lenders before you attempt to purchase a foreclosure home. Pre-approval for a mortgage is more important than pre-qualification. This is sound advice for all home buyers, but it’s especially important for those in the foreclosure market where deals are often snapped up quickly and regular buyers compete with investors who can offer cash.

If you are trying to purchase a property from a lender it may be beneficial to get a preapproved mortgage from that lender. Even if your offer is similar to others, it may help you present your bid more favorably. You don’t have to accept a lower rate from another lender. You can always cancel your mind and get a mortgage from another lender.

Investigate 203(k) loans

Traditional financing may not be an option if the home you love is not in a livable state. These homes are often sold to cash investors who don’t intend to live there.

For would-be owners who don’t have the cash to pay, the federally insured 203(k (loan) may be an option. Borrowers can include projected rehab costs in the loan.

Buyers who choose this route must hire an FHA-certified consultant to review the contractor cost estimates. The interest rates for 203(k loans are higher than standard FHA-insured loans. Buyers can also expect to pay 1 to 2 points (a point, an upfront fee equal to 1% of the loan amount).

Foreclosed condos might be difficult to finance

It is also important to remember that getting financing for a condo that has been foreclosed may be more difficult than for a single-family residence. This is because condos that are in distress can be either lost by developers or homeowners, or flourish or fail depending on their owners.

Many banks will not finance a purchase of a building where more 15% of the building’s homeowners are behind on association assessments or in a building that has a high number of rental units. Before you fall in love with a condo, ask about these factors.

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