What to Know About Buying a Foreclosure Home

For most people, their homes are their most significant investment, and mortgage lenders need assurance that they won't lose out when issuing a home loan. That’s why properties serve as collateral if their owners cannot make their mortgage payments on time.

Unfortunately, many homeowners struggle with financial hardships that prevent them from keeping their mortgage payments current, which is why many homes end up facing foreclosure. On the one hand, foreclosures are devastating for the homeowners, but on the other hand, it provides buyers with an extensive market of lower-priced properties to choose from.

If you’re considering buying a foreclosure home, here’s what you need to know about purchasing one of these properties.

What are the different types of foreclosure homes?

Foreclosure homes fall into several different categories:

• Pre-foreclosure:

  A home in pre-foreclosure has not been foreclosed on yet, but it will be if the homeowner fails to get current on their mortgage in time. While a home at this stage can’t be sold by the mortgage lender just yet, that doesn’t mean it won't be available to buy soon. Most homeowners cannot pay their outstanding debts out of pocket, so their best bet at avoiding foreclosure is to sell the home themselves before the bank gets the opportunity.

• Short sale:

  A short sale occurs when a homeowner is incapable of paying their mortgage, and the lender wants to mitigate their losses, so they are willing to sell the home for less than it is worth. Otherwise, a foreclosure may inevitably follow.

• Tax lien foreclosure:

  A tax foreclosure occurs when the homeowner fails to pay federal, state, or property taxes. This type of foreclosure sale differs from others because, in many cases, the homeowner is given a redemption period to pay back the taxes they owe with interest. If the homeowner manages to pay back their debt in time—which can range from 3 months to 3 years, with an average period of 2 years in Texas—they have the right to take their home back, even if it has already been sold.

• HOA foreclosures:

  An HOA foreclosure occurs when a homeowner does not pay their HOA dues on time. Much like tax lien foreclosures, HOA foreclosures in many states provide homeowners with a redemption period during which they can reclaim their home. In Texas, this redemption period lasts 180 days.

• Sheriff's sale auctions:

  A sheriff’s sale, or county sale, happens at the end of the foreclosure process, after a homeowner fails to get current on their mortgage within the grace period provided by their lender. The lender then sells the property in an auction, typically held at the county courthouse or sheriff’s office.

• Bank-owned properties:

  When a home does not sell at a foreclosure auction, it becomes the property of the mortgage lender. Homes in this state are referred to as bank-owned or real estate-owned (REO). While some banks list homes for sale on their websites, the easiest way to find bank-owned properties is by working with a real estate agent, who can find them on the Multiple Listing Service (MLS).

• Government foreclosures:

  When a home is purchased using a government loan, such as an FHA, VA, or USDA loan, and it goes into foreclosure, it is sold by the government. These homes for sale can be found on the HUD website.

• Online foreclosure auction houses:

  Websites like Auction.com sell foreclosure homes to online bidders, in a similar fashion to eBay. While some auctions may simply sell a home to the highest bidder, others have a minimum bid that must be met before a house can be sold.

What challenges come with buying a foreclosure home?

While foreclosure homes often come with lower price tags, there is such a thing as a deal that's too good to be true. You may save money on the upfront price, but it could cost you more in other expenses. Before committing to purchasing a foreclosure home, it's essential to consider the time, effort, and money you may need to put into it.

A foreclosure home purchase can be a slow process.

One drawback of buying a foreclosure home is that it often requires a great deal of patience. Foreclosure homes come with a lot of paperwork, and expecting that paperwork to be processed quickly is usually not realistic.

Things can move incredibly slowly in short sales, which requires contact with the home's current owner and the lender. Sales involving a redemption period complicate matters even further. You will need to wait until the period is over to know if the home is yours for the long term.

Foreclosure homes tend to need a lot of work.

When a homeowner is behind on their mortgage, they've likely fallen behind on their home’s maintenance too. As a result, foreclosure homes often require much time and money to fix. Therefore, even though the sales price is more affordable, the money needed to repair the house may make it more expensive than other homes on the market.

You might have to buy a foreclosure home without seeing it first.

Homes sold in foreclosure auctions are typically not available to be inspected before being sold, leaving you as a buyer unaware of what problems the house has. Buying an uninspected home is always risky, and it's especially dangerous in the case of a foreclosure home, which is more likely to have damage in need of repair.

Foreclosure homes may have debts attached to them.

Repair fees aren’t the only potential extra cost associated with foreclosure homes. A home may also come with debts or liens such as back taxes, tax liens, mechanics liens, or HOA liens. Once the property becomes yours, so do these debts. To avoid responsibility for any debts attached to a home, it's essential to protect yourself with title insurance.

You may run into trouble with squatters’ rights.

One of the scariest risks of buying a foreclosure home is the possibility that you'll be sharing it with an uninvited stranger. The foreclosure process often involves periods when a house is empty, providing perfect opportunities for squatters to move in. If they don't leave before you buy the home, you're left with this problem on your hands.

If the property you purchase has a squatter, you’ll not only be left feeling unsafe in your new home; you’ll also have to deal with the legal issues involved. If a squatter has resided on a property for a long enough period (10 years in Texas), they may be legally entitled to claim the property as their own, leaving you with the choice between giving up the home or entering into a legal battle to officially make it yours.

You’ll probably have lots of buyer competition.

There’s no shortage of home buyers looking for a good deal, and the nicer a foreclosure home is, the more competition you’ll have to fight for it. It’s rare for a foreclosure auction not to have multiple bidders, which means that even a property with a low starting bid may end up costing a lot more in the end. When bidding, be careful not to get swept up in the moment and end up offering more money than you want to spend.

Conclusion

While the internet makes it relatively easy to hunt down and buy foreclosure homes, it's still a complicated process that can be tricky to navigate. If you're considering purchasing a foreclosure home, be sure to weigh all the pros and cons before making any decisions. Also, be sure to work with a reliable real estate agent who can expertly guide you through the process.