Mortgage tips when purchasing a foreclosure property

Now that the foreclosure moratorium is coming to an end, more foreclosed properties may begin to reach the market in the foreseeable future. If you are considering a foreclosure in your search for a new home, it’s important to know how the buying process differs from other types of properties.

Foreclosures can be attractive to buyers due to their relatively lower price points. But they can also mean increased risk and a longer purchase process. Following are key considerations when considering a mortgage for a foreclosed property:

Know the terms

Your online searches may turn up several types of foreclosure properties including short sale—where the owner is selling the property—and real estate owned (REO), where the mortgage lender has seized the property and become the seller.

Understand the potential risks

While foreclosed properties tend to have lower upfront costs, they are also more likely to come with hidden costs for repair and updates. After all, if the previous owner was unable to meet mortgage commitments, chances are they may have also been hard-pressed to keep up with maintenance.

For this reason, it’s especially important to schedule an inspection and appraisal for short sales or REO homes—but don’t expect there to be room for negotiation based on the outcome. Foreclosed properties are typically sold as-is, but understanding the true condition of the property will help you plan your budget.

It’s also vital to note that you won’t be able to get an inspection on properties purchased through an auction or sheriff’s sale. Talk with your real estate agent to determine if that’s a level of risk you’re comfortable taking.

Plan to spend more time

Generally speaking, it takes longer to close on a foreclosed property. For starters, expect even more paperwork. In an REO, you may be looking at four months or more to close. Short sales tend to take even longer—as long as a year, in fact—because the seller’s bank must also agree on the terms. Plus, any major surprises that arise in the inspection can affect the appraisal, in turn affecting your own ability to secure mortgage approval.

Anticipate some competition

Lower prices can help contribute to a bidding war between other home buyers as well as investors. In some cases this can drive up the price beyond reason for anyone other than professional flippers or contractors.

Get preapproval from the right mortgage partner

From private lending to government-sponsored financing, there are several potential sources for your mortgage. Seek preapproval from lending institutions that have experience with foreclosed properties and whose team will work with you to develop a financing plan that supports your mutual goals.

Buying a foreclosed property isn’t for everyone. But some buyers really can benefit from purchasing a house below market value, then putting in the work needed to make it feel like home while developing longer-term appreciation.

If you’re considering investing in a foreclosure, ask your real estate agent about the pros and cons in your local market.