Today, there are many properties available to purchase. You have your standard “For Sale by Owner,” “For Sale by Realtor,” and the foreclosure property. You might think that the purchasing of a foreclosure works completely differently from any other purchase, but it doesn’t. Yes, there are some differences, but they are not as drastic as you think. One of the largest fallacies surrounding purchasing a foreclosure is that you can only pay cash. Luckily, this is not the case. If it were, many more houses would continue to sit vacant. You can use financing, you just have to know what to expect.
Cash is King in Any Transaction
Ultimately, cash is king with any home purchase. Whether a top realtor sells the home or a bank who repossessed a home is the seller – everyone wants cash. Just why is cash such a big deal? The purchase goes much faster. For a bank trying to get a property off its books, this is the key to success. Believe it or not, banks are not in the business to hold onto real estate. They don’t want to keep the foreclosed home any longer than they have to, which is why they may take a lower bid if it involves cash. Sure, they want to make their money back, but if it means getting the property off their hands, they may jump at the chance. The longer a bank holds onto a property, the more it costs them.
When you pay cash, there are no lenders to answer to and no stipulations to consider. No one cares what the appraised value of the home is or what the condition is like inside. If the bank sells the home “as-is,” there is no lender to stop the transaction. As long as the buyer does his homework and knows what the purchase entails, the sale can go much quicker with fewer headaches when cash is involved.
Watch for Financing Exclusions
The good news is you don’t need cash to purchase a foreclosure property. Some banks may strictly accept cash on certain properties, but this is not all that common. It depends on the price and the area, usually. What banks are better known for, however, is to specify what type of financing they will and will not allow. You may see auction listings that state “No VA or FHA financing” or something similar. Generally, if there is a financing exclusion, government financing gets excluded. This is because government-backed financing is often known to be difficult and time consuming. Going back to the fact that the bank wants to get the property off its hands as soon as possible, it makes sense that they don’t allow FHA or VA financing.
You should be able to tell right away what type of financing the bank offering the home for sale will allow. If you know they don’t allow FHA or VA financing, it is a good indication that the home is not in good condition. FHA and VA financing requires home inspectors to determine that the property is safe and sanitary to live in; you also have to be able to move into the home right away. Certain foreclosure properties are not in any condition for immediate move-in, which could cause issues with certain types of financing.
Appraisals May be an Issue
Aside from the living conditions of the home, the appraisal often poses a problem. If you pay cash, the appraisal does not matter. You can pay what you want for the house. It is up to you if you want to put your own money into a sinking investment. If you take out financing, though, the bank has a stake in what you purchase. If there is not enough collateral and you default on the loan, the bank loses. Typically, if the selling bank bans certain types of financing, it is a good indication that the home is not in good condition. Keep this in mind when you bid so that you are prepared for appraisal issues and possible loss of financing.
Title Searches can Pose a Problem
Another issue you may face with purchasing a foreclosure property is the title search. Because of the unique circumstances of the way the home is sold, chances are you may find liens on the property. These liens follow the property, not the owners. This means if you purchase a home with liens, they become your responsibility. No lender will take this chance, which puts your ability to secure financing at risk yet again.
Pre-Approvals are Necessary to Purchase a Foreclosure Property
Given all of the issues you could face with a foreclosure property, the selling bank often requires a pre-approval before they will accept your bid on a property. Even if they are open to any type of financing, including government-backed programs, they want a pre-approval. Some banks go as far as requiring you to secure a pre-approval from the selling bank itself. They often don’t require you to use their bank for financing if you win the bid, but this lets them know that you can secure financing and that your bid is serious.
The bottom line is that cash is not the only way to purchase a foreclosure property but it is certainly the easiest way. If you need financing, you have your work cut out for you. Because foreclosed homes often don’t have working utilities, the appraisal and inspection can prove to be more work for the professionals working on your loan. There are many obstacles you will likely have to face when you secure financing for a foreclosed home. Know this ahead of time and allow plenty of time to get the work done. Make sure to respond to your lender right away when they need something and get all of the preliminary work done ahead of time so the hard stuff is all that is left. Foreclosure properties often have a strict deadline for a closing date, so the more prepared you are for the process, the faster it will go for you.
