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Homeownership is often a long-term goal for military families, but frequent relocations and housing prices can make it seem impractical or even out of reach. There is one option, however, that might make becoming a homeowner more attainable: buying a foreclosed home.
Foreclosures occur when an owner can no longer make mortgage payments, and the lender seizes the property. The sale of these homes can offer substantial savings compared to traditional real estate purchases. However, there are unique considerations and challenges that military home buyers should be aware of when pursuing a foreclosed property.
Walk through the process of buying a foreclosed home, hone in on the specific advantages and hurdles that military buyers face, and learn practical tips for navigating the process here.
What Is a Foreclosed Home?
A foreclosed home is a property that was repossessed by the lender. The process usually goes through three main stages:
1. Pre-foreclosure: The homeowner receives notice that the lender intends to foreclose unless they settle the debt.
2. Auction: The property is auctioned to the highest bidder, usually starting at the remaining mortgage balance.
3. REO (Real Estate Owned): If the home doesn't sell at auction, it becomes an REO property owned by the lender or bank.
Buying a foreclosed property offers the potential for significant savings, but it requires extra diligence. Foreclosure homes are sold “as-is,” meaning you could be inheriting costly repairs and maintenance.
Auction vs. REO (Real Estate Owned) Foreclosures
Auction and REO are the two types of ways to buy a foreclosed home, but they differ.
Auction properties are sold to the highest bidder in a public auction. They move quickly, and the buyer is required to pay cash.
Real estate agents typically list REO properties and offer more flexibility, much like a traditional home sale. Most importantly, they allow inspections before purchasing. While REO properties may still require repairs, they're typically more transparent about the property's conditions and financing options.
Buying at an auction can be a quicker process. Although favoring tight timelines, it carries higher risk and fewer financing options, while buying an REO property requires more time but offers stability and greater opportunity for financing.
Why Foreclosures Can Be a Good Option for Military Buyers
Military families move frequently, creating the need for new primary residences. Moving can be financially draining, understandably, but it also presents unique opportunities for buying a foreclosure. Since these homes tend to be priced below market value, buyers can spend less initially and gain equity quickly.
These perks, coupled with the opportunity to finance with a VA loan, make the idea of buying a foreclosure even more appealing. In some cases, a well-priced foreclosed home can provide long-term financial benefits and serve as a profitable investment.
Risks and Challenges for Military Buyers Buying a Foreclosed Home
Although buying a foreclosed home offers numerous advantages, military buyers should prepare for some challenges:
Property Condition
Foreclosed homes are often left in poor condition. Previous owners may have neglected maintenance or removed appliances. The cost of repairs can add up quickly.
Bidding Wars
Foreclosed homes, especially those that are well-priced, attract a lot of attention, including from investors. Military buyers may face stiff competition during the auction or when bidding on a bank-owned property.
Time Constraints
A challenge of buying a foreclosed home is time constraints. The foreclosure process can be lengthy, and closing on a home might take longer than expected, especially if repairs are required. The timing can be problematic if you have a tight turnaround for a military move.
Uncertainty
The foreclosure process can be unpredictable. Delays are common, and there is a possibility that the deal could fall through at the last minute. Military families must prepare for possible setbacks.
Get more home buying help with our free guide below:
How to Find Foreclosed Homes for Sale
Online Listings
Search online for foreclosures near you. You can filter by price and location to find properties near military bases.
Real Estate Agents
Working with a real estate agent who specializes in foreclosures can help streamline the process. They’ll know where to look for foreclosures and can help you navigate the bidding process.
Government Listings
HUD, VA, and other government agencies sell foreclosed properties through online portals. These homes may offer additional benefits, such as discounts for military buyers.
Auctions
Many foreclosed homes sell at public auctions. However, these sales often require cash upfront, and properties are sold “as-is” so they can carry substantial risks.
Financing a Foreclosed Home
Military buyers can finance a foreclosed home using a variety of loan options. While VA loans are the most common, buyers can also use an FHA and conventional loan or other government-backed financing options. Working with a lender who understands the unique challenges involved is key when choosing a financing option.
If the property requires substantial repairs, you might be able to use a renovation loan, such as the VA’s Renovation Loan or an FHA 203(k), to finance both the home purchase and the cost of repairs. These loans allow you to wrap the cost of repairs into your mortgage.
Learn more about home renovation loans here.
Buying a Foreclosed Property With a VA Loan
Using a VA loan to purchase a foreclosed property can be an excellent option for military home buyers. VA home loans are available to current service members, veterans, and some surviving spouses, offering low or no down payments, no private mortgage insurance (PMI), and lower interest rates than traditional mortgages.
However, the home must meet basic livability standards as determined by a VA appraisal, which means housing that requires significant repair could be an issue. The property must pass inspection. If it doesn't, you may need to negotiate the repairs with the seller or pay for them out of pocket.
While some might think VA loans are too restrictive for foreclosures, they're still a viable financing option, assuming the property meets the necessary conditions.
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Steps to Take Before Buying a Foreclosed Home
1. Get pre-approved for a loan.
Understand your budget and get pre-approved for a loan. This step gives you a clear idea of what you can afford and helps you act fast if you find the right property.
2. Hire a home inspector.
Foreclosed properties often require repairs. Hire a professional inspector to assess the property's condition and identify any major issues.
3. Research repair costs.
Factor in potential home repair costs. A low purchase price might be tempting, but expensive repairs can quickly turn a good deal into a financial burden.
4. Understand the foreclosure timeline.
The foreclosure process can be lengthy, with unexpected delays. Be patient and plan accordingly, especially when working around a PCS move.
5. Work with an experienced real estate agent.
A real estate agent familiar with foreclosures and VA loans can help you navigate the complexities of the process.
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Frequently Asked Questions About Buying a Foreclosed Home
1. Are there any special benefits for military and veteran buyers when purchasing a foreclosed home?
Military and veteran buyers have several advantages when purchasing a foreclosed home. The most significant benefit is the ability to use a VA loan, which offers no down payment and competitive interest rates.
Military and veterans may also qualify for discounts or special programs when purchasing homes through government agencies like HUD or VA.
2. What should I look for when inspecting a foreclosed home?
Pay close attention to potential issues that may not be immediately obvious, such as plumbing problems, electrical issues, foundation damage, and roof leaks. Keep in mind that the seller is not responsible for repairs. Hiring a professional inspector is critical to assess the property's condition.
3. Can I negotiate the price of a foreclosed home?
Yes, you can often negotiate the price of an REO (bank-owned) property. Unlike auction properties, where the price is set by bidding, the lender or bank sets an REO home's price.
If the property has been on the market for a while, the seller may be open to offers below the asking price, especially if the home needs repairs.
4. How long does it take to buy a foreclosed home?
The timeline for purchasing a foreclosure can vary, depending on whether you buy at auction or from a bank as an REO home. Auctions typically require a quick turnaround and close in a matter of weeks.
An REO property sale takes longer, sometimes 30 to 60 days, as it involves a traditional closing process, including inspections, appraisals, and negotiations.
5. Are there any extra costs associated with buying a foreclosed home?
Buying a foreclosed home can come with additional costs. Aside from funding repairs, some foreclosures come with unpaid property taxes or liens you may be responsible for paying. In some cases, you may need to cover legal fees, such as clearing a title or handling any disputes that arise from the foreclosure. Factor in these potential expenses when determining your total budget for purchasing a foreclosed home.
Buying a foreclosed home can be an excellent way for military families to find affordable housing with the potential for significant equity growth. However, it’s not without its risks and challenges. By carefully researching properties, securing proper financing, and working with professionals who understand the nuances of the foreclosure process, military buyers can make a smart investment out of a forgotten property. And with the right approach, buying a foreclosure can become a valuable asset, offering financial savings and a place to call home.
By Danielle Keech
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