How to Finance a Foreclosed Property

Being prepared is the key to financing a foreclosed property. The good news is, if a foreclosed property is in decent condition and you have a good credit history, the deal could work like a traditional home purchase. Of course, a loan can be influenced by the home’s condition and whether the property will be used as a primary residence or if it’s being purchased as an investment.

First step: get pre-approved

If you will need financing, begin talking with lenders long before attempting to buy a foreclosure property. Aim to become pre-approved for a mortgage, not just pre-qualified. That's solid advice for any home buyer, but it’s especially important in the foreclosure market, where good deals are snapped up quickly and regular buyers are competing with investors who can offer cash.

If you're trying to buy a property from a lender, it may help to get a pre-approved mortgage from that particular lender. Doing so may cast your bid in a more favorable light, even if it’s similar to others. Plus, you're not locked in if another lender offers you better terms. You can always change your mind and get your mortgage from another source.

Investigate 203(k) loans

If the home you fall in love with is not in livable condition, traditional financing may not be an option. These homes often go to cash investors who don’t actually plan to live in the home.

For would-be owner-occupants who can’t offer cash, the federally insured 203(k) loan may be a good alternative because borrowers can roll projected rehab costs into the loan.

Buyers going this route generally must hire an independent, FHA-certified consultant to review contractor cost estimates. Interest rates on 203(k) loans are higher than on standard FHA-insured loans, and a buyer also can expect to pay 1 or 2 points (a point is an upfront charge equal to 1 percent of the loan amount).

Foreclosed condos may be difficult to finance

It's also important to note that obtaining a loan for a foreclosed condo may be significantly more difficult than getting financing for a single-family home. That’s because distressed condos, lost either by homeowners or developers, can flourish or flounder depending upon fellow owners.

Many banks won’t finance a purchase in a building where more than 15 percent of a building’s homeowners have overdue association assessments, or in a building with a high percentage of rental units. Ask about these factors before falling in love with a condo for which it’s going to be difficult to find financing.