Financing Options for Purchasing a Foreclosure
If you are looking for a wonderful deal on a new home, purchasing a foreclosure can, in some cases, be a good option.
While these properties certainly have their risks, purchasing a foreclosure can help you get a quality home at a decent price. It may not be for everyone, but a foreclosure could be right for you.
Financing a foreclosure can be complicated, but there are options available for virtually any buyer in any price range.
Purchasing a Foreclosure: What are Your Financing Options?
Mortgages are often categorized as either conventional or unconventional, and some people assume that the only way to purchase a foreclosure is to use an “unconventional” loan. (After all, the type of purchase itself is fairly unconventional.) However, conventional loans are possible for this type of purchase.
A conventional loan is simply financing that is not regulated or supported by a government agency (FHA, USDA, VA, etc) or a government-backed company (Fannie Mae, Freddie Mac). Conventional loans can fall into a broad range of types, but the underlying factor is simply the absence of government involvement.
These loans are often riskier to the lender, but they can be versatile and useful to the borrower, especially when you need financing that doesn’t conform to a specific, typical situation. When purchasing a foreclosure, especially one that may be higher on the pricing range, you should look at options for conventional financing.
FHA 203(k) Loans
Foreclosures have a reputation for being worn and unmaintained. For this reason, many buyers will turn to the FHA’s 203(k) housing option, which allows homeowners to add up to $35,000 in extra financing. This extra money can then be used for repairs, improvements, and upgrades. You’ll have extra money for completing a wide range of project, including necessary repairs, such as roofing or plumbing work, or home improvements, such as kitchen or bathroom upgrades.
In many cases, funds provided by the 203(k) loan are used for repairs that have been identified by the home inspector or an FHA-approved appraiser.
203(k) loans can not only be used by homebuyers, they can also be used by homeowners who want to prepare their home for sale. However, when buying a foreclosure, it’s often a good option, as it allows you to make significant improvements, and the 203(k) program is viewed as an important tool for improving neighborhoods.
The HomeReady program, which is available for HomePath property, is designed to provide accessible financing for a wide range of options, and it’s often a good choice for people who need to purchase a foreclosure. Not only does it make financing an affordable foreclosure possible, it also allows for low-down payment financing, which can create greater access to the real estate market for many buyers. HomeReady mortgages can be approved with as little as 3.5% down, and no minimum contribution is required from your personal funds. (Assuming the foreclosure is a one-unit property.)
HomeReady has features that include conventional home financing with private mortgage insurance that is eligible for cancellation, which many not be possible with other loan options.
To use HomeReady financing, you will need to complete homeownership education. While it may seem like a hassle, this financing helps you prepare for the responsibilities of owning a home. This is a required part of the program, but it can be completed online for greater convenience.
HomeStyle Renovation Mortgage
This is another form of financing that allows you to get the money you need for the purchase as well as the cost of repairs. It can be used for remodeling, renovations, and even for energy-efficiency upgrades on a foreclosure.
With a HomeStyle Renovation loan, there are no required improvements, and there are no restrictions on the types of repairs that you can make. There is also no minimum dollar amount for repairs, making this a versatile and useful financing option for people who wish to purchase a foreclosed property.
However, if you choose to use a portion of the HomeStyle Renovation loan for energy-efficiency improvements, you will need to obtain an energy report to identify the recommended improvements and the estimated cost savings.
When using a HomeStyle Renovation mortgage, you can purchase and remodel the home, making either cosmetic or structural improvements. There is a 10% minimum down payment for most homes, but a 3% seller contribution is allowed.
Jumbo loans, which by definition are for large purchases on high-priced property, may be available for the purchase of a foreclosed home. However, you will need to meet many qualification requirements, which will vary depending on the lender.
In most cases, the lender will want to look at your income, debt-to-income ration, cash reserves, and credit score before writing a jumbo loan, foreclosure or not. The lender will also likely require a significant down payment in order to lend the amount required.
Despite the requirements, you may find that a jumbo loan is the perfect option for purchasing a top-of-the-market home that is now more affordable because of a foreclosure.
Final Thought: The Difficulties of Financing Foreclosed Condos
If you are looking at a foreclosed condo, financing can be difficult. This is because foreclosed condos can rise of fall in value depending on fellow owners. Also, if any financial troubles happen after you purchase the home, the bank may have difficulty seizing the property and recovering their investment.
Banks may avoid lending on a property where a portion of the owners have overdue association payments or buildings with a high percentage of rentals. If you are seeking a foreclosed condo, it’s essential that you work with a knowledgable mortgage professional who can help you find the best options.
Put a Mortgage Expert on Your Team
Purchasing a foreclosure can be difficult, but with the right help, you can find a home that fits your needs and budget. We understand the complexities of the real estate market, so let us put our knowledge and experience to work for you!