By Annemarie Rogers, Mortgage Loan Officer
Buying a foreclosed property can be a great way to get a good deal on a home, but the process of buying a foreclosed home doesn’t come without its challenges. While foreclosed properties can be a good deal, it’s important to know how buying a foreclosure can impact the mortgage process and which financing options you have.
When a home falls into foreclosure, the homeowner had a mortgage and was unable to make the payments. When a homeowner is behind on their mortgage, they may be financially unable to complete basic maintenance items that affect the condition of the home. Also, a homeowner or third party may remove items from the home essential to the functioning of the home, such as a hot water heater, furnace or copper pipes.
Most foreclosures are sold in “as is” condition, which means the lender who owns the property will not do any repairs that may be required on a mortgage appraisal, such as repair or replacement of mechanicals, water damage or foundation damage. However, there are solutions for financing a home where repairs are needed.
Renovation loans allow a buyer to purchase a home that doesn’t meet mortgage guidelines by financing the cost of repairs with the purchase of the home. Renovation loans require some extra work and planning. Before a mortgage application can be started, the buyer needs to have bids from licensed contractors for all of the work that will be completed. If you don’t have experience working with a licensed professional, getting bids quickly can become a daunting task. However, you should always get a home inspection when purchasing a property and the inspector may be able to provide you with the names of reliable professionals. Online resources may also help you find the professionals you need to get your bids together.
It’s important to note that foreclosures owned by the Department of Housing and Urban Development (HUD) may allow some repairs to be financed when purchasing the home using a FHA loan. For homes requiring more significant repairs, HUD will allow FHA financing using its renovation loan, known as a 203k loan. FHA offers two options for a 203k. A streamline 203k for repairs up to $5,000 that do not include any structural repairs. Home renovations over $5,000 and those requiring structural repairs require a buyer hire a 203k consultant who will do an analysis of repairs necessary to bring a home to meet FHA standards.
Another important consideration is the cost to renovate the home. Most repairs do not provide dollar-for-dollar return in the value of the home. On conventional renovation loans, the value is the lesser of the purchase price with renovation costs or the as completed appraised value.
Once you determine whether the cost of the repairs on a foreclosed home are worth the work and expense, you can proceed with your purchase. However, there may be cases where the expense of the improvements is too great that it is best to walk away.