When buying a home for the first time (or tenth), one option to look at is purchasing a pre-foreclosure home. While it is not ideal for a seller, it can be an excellent opportunity for buyers and help sellers avoid having a negative credit report. Let's dive into how to buy a pre-foreclosure home.
What is a Pre-Foreclosure
A pre-foreclosure is the first step in the legal process of foreclosure. It allows homeowners a chance to fix the situation that may be causing them to miss their mortgage payments, allowing them to keep their homes. Typically, when a home goes into pre-foreclosure, a homeowner may sell the house for less than what they owe - a short sale. However, this is unlikely to happen as banks are often involved with a pre-foreclosure deal.
Buying a Pre-Foreclosed Home: Pros and Cons
There are a few reasons why (and why not) to buy a pre-foreclosure. In these instances, it's always good to look at the pros and cons of each.
Pros of Buying a Pre-Foreclosure Home
Motivated Sellers
Sellers of pre-foreclosures are often motivated to sell the home quickly - meaning they are more likely to accept the first offer that may come their way. The benefit to the seller of getting this offer fast is that a sale on a pre-foreclosure has a far less negative impact on a credit report than a home going through foreclosure.
Lower Costs
Buying a pre-foreclosure home can also result in significant cost savings for the buyer. Since the seller is often eager to sell, they may be willing to accept a lower offer than what the home would be worth on the market. Additionally, pre-foreclosure dwellings may sell as-is, which means that the buyer can negotiate the price down further to account for any repairs or renovations needed.
More Financing Options
When buying a pre-foreclosure home, more financing options may be available to the buyer. For example, the seller may be willing to carry the loan, meaning the buyer can make payments directly to the seller rather than to a traditional lender. These options benefit buyers with difficulty obtaining financing through a bank or other lending institution. It's also important to understand your home loan options.
Cons of Buying a Pre-Foreclosure Home
Slow Process
Buying a pre-foreclosure home can be a slow process. The seller may need to be more responsive to inquiries, and the bank may take a long time to approve the sale. Additionally, the buyer may need to wait for the current occupants to vacate the property before they can take possession, which can further delay the process.
Competition
Because pre-foreclosure homes are often priced lower than market value, there may be a lot of competition among buyers. Higher competition can result in bidding wars, which can drive up the price of the home and make it more difficult for the buyer to secure the property. In some cases, buyers may need to act quickly to make an offer and secure the sale.
Structure Issues or Possible Damage
Pre-foreclosure homes may have structural issues or other damage that the buyer may need to be aware of. While a home inspection can help to identify these issues, the buyer may only have access to the property after the sale is complete. Damages can result in unexpected repairs and cost the buyer may have yet to budget for.
Unforeseen Costs
In addition to potential repair costs, other unforeseen costs may come up with buying a pre-foreclosure home. For example, the buyer may need to pay back taxes or liens on the property, which can add thousands of dollars to the purchase price. Additionally, the buyer may need to pay for additional inspections or surveys to ensure the property is in good condition.
Unpredictable Risk
Buying a pre-foreclosure home can be a risky proposition. The seller may have undisclosed liens or other legal issues that could result in the sale falling through. Additionally, the buyer may need help to secure financing, or the bank may reject the deal for several reasons. As with any real estate transaction, there is always some degree of risk involved.
How to Buy a Pre-Foreclosure
Now that we have set the groundwork for understanding what a Pre-Foreclosure is and the pros and cons of buying one, we can now look at how to buy a pre-foreclosure home.
Get Pre-Approved
Pre-approval for a mortgage can give you an advantage over competing buyers when making an offer on a pre-foreclosure home. Pre-approval means a lender has reviewed your financial information and has determined how much money they are willing to lend you for a home purchase, which gives you a better idea of your budget. When looking to purchase a pre-foreclosure, Valor Mortgage can help you get pre-approved to buy a home.
Find a Pre-Foreclosure
Working with a real estate agent with experience in pre-foreclosure homes can save you time and help you find the best deals. They may also have access to un publicly advertised pre-foreclosure listings, which can give you an advantage over other buyers.
How to Find a Pre-Foreclosure
You can also check public records at the county clerk's office to find pre-foreclosure listings in your area. In addition, some online resources and services can help you locate pre-foreclosure properties, such as foreclosure listing websites and subscription services.
Inspect the Neighborhood
Talking to neighbors and local business owners can also give you insight into the community and help you make an educated decision about the property. They can provide information on the quality of schools, safety, noise levels, and any other factors that may impact your decision to purchase the home.
Make an Offer
It's critical to have a backup plan in case your offer falls through, such as having backup properties in mind or being open to negotiating with the seller. In addition, it's essential to carefully review and understand the terms of the purchase contract before making an offer, as this will outline the conditions of the sale.
Get a Home Inspection
If the home inspection reveals significant property issues, consider reconsidering your purchase or negotiating a lower price with the seller. A thorough home inspection can also give you an idea of any repairs or maintenance that may later need to be done, which can impact your budget and decision to purchase the property.
Close On Your Home
Closing costs can add up, so budgeting for these expenses and the down payment and mortgage payments is essential. Consider hiring a real estate attorney or working with a title company to help guide you through the closing process.
