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When you're buying a home on a limited budget, foreclosures offer a chance to get into a neighborhood you otherwise couldn't afford. That's important if you have children and are looking to buy in a specific school district or want amenities that come with living in a particular town.
Buyers often incur closing costs when they purchase a property. When you buy a foreclosed home, you can sometimes get the lender to cover your closing costs or make other financing concessions that make the property more affordable. On the other hand, there are several drawbacks you might encounter when buying a foreclosure.
Here are a few you should know about. When you buy a foreclosed home at an auction, you can forget about financing that purchase with a mortgage -- auction purchases need to be paid for in cash.
Granted, you don't necessarily need to come up with the entire purchase price on the day of the auction. You might just need to make a down payment. But you'll need to produce the rest of the cash shortly after the fact. This restriction could limit you to properties that don't actually meet your needs or result in cash-flow issues.
The previous owners of foreclosed homes often don't do the best job of maintaining them. Homeowners who become delinquent on their mortgage payments tend to have cash-flow issues, so their properties are commonly left in disarray. Furthermore, banks that reclaim foreclosed homes rarely make repairs. When you buy a foreclosure, you're getting that property as-is. And although a home inspection will reveal any glaring issues, you'll need to fix them on your own dime.
Rack up enough repairs and the savings from snagging a lower purchase price might be wiped out. Of course, this assumes you're not buying a foreclosure at an auction. In that case, you won't get an opportunity to have an inspection done, increasing your risk of taking on more costs.
Although lenders try to unload foreclosed properties quickly, the closing process can be lengthy. Banks often have backlogs that delay closing.
The lender usually clears the title and evicts the current homeowner before you buy a foreclosed property. These homes are usually sold as-is. Most lenders hand foreclosed properties off to an REOagent who works with standard real estate agents to find a buyer.
Not every real estate agent has experience working with REO agents. Research real estate agents in your area and connect with an agent who specializes in foreclosure sales. Although your real estate agent will likely be able to help you search for foreclosures, you may want to investigate for yourself as well. The internet has made it much easier than it used to be to find foreclosures in your area and in other parts of the U.
There are now multiple different areas of the web where you can search. Here are three we especially recommend:. A preapproval lets you know how much you can get in a home loan. Choose a lender and apply for a mortgage preapproval to narrow your search. Inspections and appraisals are both crucial when it comes to buying a foreclosure. An appraisal is a lender requirement that lets you know how much money a property is worth. A home inspection is a more in-depth look at a property.
An expert will walk through the home and write down everything that needs to be replaced or repaired. Because foreclosures usually have more damage than homes for sale by owner, you should insist on an inspection before buying a foreclosed home. Contact your mortgage lender to finalize your loan if you have the money or skills to make any needed renovations. Your real estate agent will help you submit your offer and prepare you for closing.
Below are some of the drawbacks to buying a foreclosed property. Buying a foreclosure can be a unique opportunity for homebuyers looking to pay lower prices or below market value or for complete home restoration projects. Keep in mind that many foreclosed homes could have severe damage and structural issues, and are usually sold as-is.
Get in contact with an experienced real estate agent if you want to take a risk on a foreclosure.
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