When it comes to buying a bank-owned REO home, cash is king. There’s no one to tell you that you can’t buy the property, as the money is yours. When you opt to finance a home, you have a bank and/or investor telling you what you can and can’t do with the money. This could hamper the process of buying a foreclosed home.
Technically, you can use any type of financing when buying a bank-owned home, but certain loan programs will give you more trouble than others.
Depending on how much money you put down on the home, conventional lenders may get picky about the condition of the foreclosed home. Generally, these homes are sold ‘as-is.’ This could mean that there are many problems with the home as foreclosed homes can be in poor condition.
Upon the appraiser’s inspection, the bank may decide to back out of the deal if the home is not considered safe enough for living. However, conventional loans have the most relaxed guidelines when it comes to the appraisal. The appraiser is mostly after the value of the home, not the condition. Any remarks he makes regarding the condition is usually only in terms of the home’s value.
FHA financing is perhaps one of the most avoided types of financing when buying a bank-owned REO home. The FHA not only has the same standards as conventional loans require, but they have more. The appraiser must report on the condition of the property.
HUD sets minimum standards that the home must meet in order to qualify. Not only does the appraiser need to figure out the home’s value, but also its condition and livability. In other words, if the home is not immediately livable and deemed safe and sanitary, the FHA will not allow FHA financing on the home.
The Appraisal Can Hurt an REO Purchase
No matter the type of financing you choose, the appraisal can be the deal breaker. You put in a bid on the home. Usually, this bid is less than the value of the home because the bank is trying to get rid of it. But, if it so happens that you bid more than the home is worth because of its condition, no lender will give you a loan on the home.
When you buy a home with cash, you don’t need an appraisal. There is nothing that can cause the deal to fall through unless you decide to back out. You are the only one calling the shots in this type of deal. When you secure financing, there is another responsible party – the bank. Their money is at risk. If they let you buy a home that is worth less than you pay or in poor condition, you may default on the loan. Many buyers get in over their head, dealing with expensive repairs and renovations, causing them to be unable to make their mortgage payments. This is what the bank wants to avoid and is why they are picky when it comes to buying an REO property.
If you want to buy an REO property, it’s best if you can pay cash. If you can’t, your next best bet is to put down a large down payment. The less the bank has to lend you, the fewer requirements they will put on your ability to purchase the home. Of course, it pays to have an inspection and truly know what you are getting into before buying the home. If the home is in bad disrepair, you could be in for a long road ahead as you get the home in living condition.