What Is a Foreclosure Property?

Posted November 03 2014
by PenFed Team
For sale foreclosure sign in front of a home

Your friends, family, and coworkers are encouraging you to win the house-hunting game with a great deal on a foreclosed home, but you think it sounds a little sketchy. Doesn’t a foreclosure mean a lot of cumbersome financing issues for a home that’s probably in dicey condition? Both of those things could be true, but you could also walk away with the best deal of your life. Here’s what you can expect from a foreclosure.

A foreclosure, often called a real-estate-owned (REO) property, is a home that’s owned by a lender because the owner defaulted on the loan. If the loan was obtained from a bank or credit union, the lender becomes the property owner. If the mortgage was financed through a government-insured program like an FHA or VA loan, the government becomes the property owner. Either way, lenders need to recoup their losses by repossessing and reselling the foreclosed home.

Here’s where their loss is your gain: Lenders don’t want these homes sitting on the market, dragging their accounting ledgers into the red. They want them back into the hands of a mortgage-paying homeowner, and they’ll often sell for less than fair market value to achieve that. And when you manage to snag a property for less than its value, you gain instant equity, putting you ahead of the game if you decide to resell the house later.

How to Find Foreclosures

Because lenders are so anxious to move foreclosures quickly, you won’t always find them listed among traditional home listings. You can shop for them there, but remember that many foreclosures move at light speed. You’re most likely to find the best deals via a REALTOR who specializes in foreclosures and keeps a finger on all the nooks and crannies where foreclosures are usually found.

Other ways to find foreclosures include newspaper listings, online real estate listings, and bank and government websites that list REO properties. Your best bet is an online web search for “foreclosures” or “REO properties” covering your area.

If you’re willing to purchase a house sight unseen and feel confident that you won’t get swept away by the excitement of a great deal that might be beyond your budget, you can also find foreclosures at public foreclosure auctions. Search online to find auctions in your area.

Closing on a Foreclosure

Purchasing a foreclosure can be trickier than a typical home purchase because you’ll have a few extra steps to go through along the way. The bank, and in some cases an investor, will also have to approve your offer. Even though many foreclosures are priced at less than market value, make sure your offer is reasonable and fair.

Even so, don’t forget that lenders want to move these properties off their books. Things are going to move fast. You’ll need pre-approval for a loan in hand if you want to have any hope of beating out other potential buyers.

Keep in mind that a bank that owns a foreclosed property will not have first-hand knowledge about the property or its condition. Because of that, don’t expect to receive a Seller’s Disclosure form. It’s a smart idea to invest in a professional home inspection as well as a full title search before deciding to make an offer.

Finally, consider all the financing possibilities. If you find that the home you’d like to buy needs significant repairs, it might be eligible for an FHA 203(k) Renovation Loan covering the “improved value” of the home—your purchase price plus the cost of necessary renovations. Requirements for government-backed loans vary in the case of REO properties, and even non-veterans can qualify for special financing on VA foreclosures from the Department of Veterans Affairs.

PenFed offers a variety of mortgage options to support your search for a great deal on a new home. Get in touch with us and let us show you how we can help.