If you have the cash, a steady job and the desire to become a homeowner, you may be tempted by the thought of buying a foreclosure. While there are some bargains to be found, you do need some education and some professional guidance before you jump into making an offer.

TUTORIAL: Exploring Real Estate Investments

Types of Foreclosure Purchases
The term "foreclosure" gets tossed around a lot, and generally refers to properties that have been repossessed by the lender because the homeowners were unable to pay their mortgage. Some foreclosures are owned directly by a bank, but others are owned by Fannie Mae, Freddie Mac and HUD. Some foreclosures are sold through real estate agents, while others are sold at auction.

Financing
The first step you should take if you want to buy a foreclosure is to consult with a lender. No matter which method you use to buy a foreclosure, or who you buy it from, you will need financing. Be prepared to document your income and assets, and to have your debt-to-income ratio and your credit history reviewed. If you are purchasing the home as an owner-occupant, you may have more financing options than if you are purchasing as an investor, since there are some special financing incentives from government agencies to encourage buyers to purchase a foreclosure and live in it. Investors generally need to make a higher down payment when purchasing a home, often as much as 25% or more.

You can buy a foreclosure with FHA, VA or conventional loans provided the home meets the loan guidelines for condition. One option that many foreclosure buyers have taken advantage of is an FHA 203(k) loan that allows you to wrap renovation costs into the mortgage.

Of course, if you can pay cash, you'll find it much easier to buy a foreclosure. (For related reading, see Avoiding Foreclosure Scams.)

Pricing
Many buyers assume that buying a foreclosure means you are getting a bargain, but this is not always the case. Banks that are selling foreclosures are hoping to recoup as much of their costs as possible, so, if the property is in good condition, it may be listed at market value or just below market value. Homes that are priced extremely low may be in terrible condition or the bank may also be hoping to encourage a bidding war. Foreclosures in some markets receive multiple offers and can end up selling far above the list price.

If you become involved in a bidding war, or are purchasing a home at an auction, make sure you know your comfort level with your mortgage payment and have worked with a real estate agent to evaluate the market value of homes in your area so that you don't overpay.

Condition
Foreclosures are sold as is, which means that while you can have a home inspection for knowledge of the property, the owner (the bank or government agency) is under no obligation to fix anything. Some foreclosures have been vandalized and will lack appliances and even kitchen cabinets, while others have been vacant for so long, that they have issues with mold or other damage. On the other hand, some foreclosures have been maintained or even improved with some new appliances, fresh paint and new carpet. Just make sure you are aware of the condition and understand the costs you may incur if you have to make repairs. A bargain isn't such a bargain if you need to spend thousands of dollars to bring the home to a livable condition.

Incentives
Fannie Mae offers special financing and incentives to buyers of its foreclosures through its HomePath program, including closing cost assistance up to 3.5% for owner-occupants and low down payment loans.

Freddie Mac offers its First Look program to owner-occupants that allows them the first chance at buying one of its foreclosures before investors are allowed to make an offer. The Freddie Mac HomeSteps program includes a home warranty and savings on new appliances.

HUD foreclosures located in areas that need revitalization are available at bargain prices for law enforcement officers, teachers, firefighters and EMTs. The HUD Home Store offers details about HUD-owned homes in every state.

The Bottom Line
Purchasing a foreclosure can be a great way to become a homeowner, but you need to work with a Realtor with experience in foreclosure purchases and plenty of local knowledge to make sure the home you buy is truly a bargain rather than a money pit. (For related reading, see Investing In Foreclosures Not A Get-Rich Quick Venture.)

Related Articles
  1. Home & Auto

    Rent-To-Own Homes: How The Process Works

    A rent-to-own agreement can benefit homebuyers with bad credit or insufficient funds for a down payment. Here’s how one works.
  2. Home & Auto

    7 Must-Have Real Estate Contract Conditions

    Buying a home can bury you in paperwork. But it’s worth your time to make sure your contract contains these seven important conditions.
  3. Home & Auto

    Understanding Pre-Qualification Vs. Pre-Approval

    Contrary to popular belief, being pre-qualified for a mortgage doesn’t mean you’re pre-approved for a home loan.
  4. Home & Auto

    9 Tips for Handling Homeowners’ Associations

    Before you buy property in a community with an HOA, there are nine things you should do.
  5. Home & Auto

    6 Reasons To Avoid Private Mortgage Insurance

    Homebuyers who put less than 20% down will likely be forced to secure private mortgage insurance. Here are six reasons to avoid it.
  6. Home & Auto

    10 Tips for Getting a Fair Price on a Home

    When the housing market booms, it's tougher than ever to get a good price. Make sure the house you choose is worth the price you pay.
  7. Investing Basics

    Top 10 Features Of A Profitable Rental Property

    Owning rental property is a tough business. Here are 10 things you should consider before investing in an income property.
  8. Home & Auto

    Top 5 Must-Haves For Flipping Houses

    Flipping a house means a lot more than just giving it a fresh coat of paint and a new mailbox. Here's what else you'll need.
  9. Budgeting

    Beach Property in California: The Pros & Cons

    Learn the pros and cons of buying a beach condo in California, and how to protect yourself from common pitfalls many condominium buyers experience.
  10. Budgeting

    Beach Property in Puerto Rico: The Pros & Cons

    Learn these important tips for buying a beach condo in Puerto Rico. You need to have a buyer's agent and an attorney to represent your interests.
RELATED FAQS
  1. Do FHA loans require escrow accounts?

    Federal Housing Administration (FHA) loans require escrow accounts for property taxes, homeowners insurance and mortgage ... Read Full Answer >>
  2. Do FHA loans have prepayment penalties?

    Unlike subprime mortgages issued by some conventional commercial lenders, Federal Housing Administration (FHA) loans do not ... Read Full Answer >>
  3. Can FHA loans be refinanced?

    Federal Housing Administration (FHA) loans can be refinanced in several ways. According to the U.S. Department of Housing ... Read Full Answer >>
  4. Can FHA loans be used for investment property?

    Federal Housing Administration (FHA) loans were created to promote homeownership. These loans have lower down payment requirements ... Read Full Answer >>
  5. Do FHA loans have private mortgage insurance (PMI)?

    he When you make a down payment from 3 to 20% of the value of your home and take out a Federal Housing Administration (FHA) ... Read Full Answer >>
  6. How many FHA loans can I have?

    Generally, the Federal Housing Administration (FHA) does not insure more than one mortgage per borrower. This is to prevent ... Read Full Answer >>
Trading Center