Can I Get a Loan for Buying a House in Foreclosure?

One of the main reasons that people hold off from buying a house in foreclosure is because they don’t know much about the process of getting a loan for it. Very few people can afford to purchase a home without a mortgage, so it is a legitimate concern. However, given the fact that several major banks are considering restarting the foreclosure process now that the major threat of the pandemic is coming to an end, now might be the time to take a second look at buying a house in foreclosure. Not only can get you preapproved for a mortgage to help offset the costs, but with the current housing shortage, this might be the only affordable way to get your footing within the real estate market.

You Can Get a Loan, But Can’t Find a Home

It used to be that the largest obstacle facing new homeowners was “how to get preapproved for a mortgage”, and then the simpler part was finding a home. However, the current housing shortage has added one more layer to the process of buying a home. Now there are plenty of people approved for mortgages, but there are not enough homes. It is not uncommon in many suburban housing markets for homes to sell within one day of listing. Unfortunately, many lenders like Goldman Sachs predict the housing shortage will last for at least three years because:

The millennial boom in first-time homebuyers has just started
Foreclosures won’t keep up with the buying rate
Home sales at are the highest level since 2006 – while housing supply is the lowest it has been this century
Lack of construction workers/materials and the high prices of lumber

So what does this mean for you? It means that now is a good time to look into getting a loan for buying a house in foreclosure because you might not be able to find/afford a traditional home due to the housing shortage. The good news is that you can find bank loans designed to help homebuyers who want to save some money by buying a house in foreclosure. From the Fannie Mae HomeStyle program to an FHA 203k rehab loan, there are options available for you even if you want to get a mortgage with little or no money down.

The Process of Getting Loan for Buying a House in Foreclosure

If you are ready to explore the process of getting a loan for buying a house in foreclosure, you might be pleasantly surprised to learn that there options available to you. Some people who have liquid cash available to them are willing to pay cash upfront and then refinance the home once they own it in order to get back the majority of their investment funds. While you will then have to pay the mortgage, it is a fast way to buy a foreclosure that only ties up your liquid cash for a limited time period.

However, if you are like most people who are looking at bank loans you probably don’t have large cash reserves to draw on. That’s okay because you can get preapproved for a mortgage and still find foreclosed homes to purchase. You will want to get a pre-approval letter prior to home shopping because most agents will require proof before they accept your offer. This is especially important in today’s market since houses are going like hotcakes. You need to have the ability to make an offer on the same day you view a home because it may be gone the next day.

There are several unique things you need to know when making an offer on a foreclosed home because the buying process looks different. For example, most of the time you will be purchasing a home “as-is.” Therefore, don’t expect the bank to make any improvements or discount the home price following your home inspection. However, you still absolutely need a home inspection to make sure you aren’t walking into a money pit. There is a major difference between buying a home that needs new flooring and buying a home with structural issues that are negatively affecting the foundation.

Conventional Loans Vs. Foreclosure Loans

If the foreclosure you are looking at is in reasonable shape and only requires modest repairs then you may be fine securing a conventional loan when buying a house in foreclosure. All home inspections turn up issues unless you are buying a brand new home, so mild issues aren’t going to cause any issues with your loan application. However, if you are getting a loan for buying a house in foreclosure that has major issues then you may need to consider applying for an FHA 203k rehab loan.

This type of loan is unique because it allows the homebuyer to bundle together the home mortgage and estimated repair costs into one loan. This can make a fixer-upper an option if you have the ability to fix up a home but not necessarily the upfront funds and it is guaranteed by the FHA which makes lenders a bit more apt to approve it.

FHA 203k rehab loans:

Available to homebuyers with a credit score of 580+
Must be used for a primary home purchase
Require 3.5% minimum down payment
Renovations are limited to repairs not considered “luxury” by the FHA

Fannie Mae also offers a similar lending program that is comparable to FHA 203k rehab loans called the Fannie Mae HomeStyle program. The loan program is set up to appeal to those who are looking into getting a loan for buying a house in foreclosure who have a strong financial profile. While it is considered a lower cost than the FHA 203k rehab loan, the credit score requirements and down payment rules are much stricter.

Fannie Mae HomeStyle program:

Down payments start at 3% for primary residences
Can also be used to buy multifamily units and investment properties
Appraiser considers the future value of home following repair work
All work is inspected following completion
Mortgage payments can be absorbed by the loan prior to the move-in date pending renovation