How to Borrow on a Foreclosure

Collecting data before meeting with a loan officer enhances the probability of loan approval.

Today's real estate investor has access to a number of financing alternatives offered by institutional lenders, including commercial banks and savings associations, and by non-institutional lenders, including credit unions and real estate investment trusts. However, obtaining financing for a foreclosure property may be difficult in that such a purchase may entail the payment of loan reinstatement costs, rehab costs, closing costs, carrying costs and sales marketing costs. Collecting particular information before meeting with a loan officer will enhance the likelihood that such a loan will be approved.

Instructions

1. A number of methods exist for the borrower to identify foreclosures subject to a court-ordered sale at public auction. These enable a buyer to purchase a property from banks and other lending institutions that have repossessed the property, from trustees during a bankruptcy or from government agencies. Notices of the sale of such properties appear in the legal notices section of local newspapers and online marketplaces for foreclosed properties. In addition, a list of foreclosure filings can be viewed at the civil court clerk's office or in specialized newspapers that report court filings.

2. Foreclosing on a mortgage or a deed of trust in default is a judicial procedure. The file of the foreclosure action that includes the complaint, summons and notices can be accessed by means of the court system. Information of particular interest to the borrower and the lender includes who holds the mortgage or note on the property and the amount of any outstanding loans or liens against the property. These liabilities must be paid by the purchaser before taking ownership of the property.

3. A title expert can be hired by the borrower to review records pertaining to the property -- including deeds, mortgages, trusts and court records -- to identify any existing liens or claims against the property and determine who has the right to transfer the ownership of the property and the liens or claims that must be satisfied to take ownership of the property.

4. Before placing a bid on a foreclosed property, the buyer can request information regarding the minimum bid that the lender will accept from the trustee of the foreclosed property.

5. A real estate appraisal can be obtained by the borrower to determine the fair value of a property in light of the property itself and the sales of like properties in its vicinity. The organization that finances the purchase of the foreclosed property will require the appraisal to ensure the value of the property is at least equivalent to the amount of the mortgage.

6. The estimated cash flow to be derived from the property can be calculated by the borrower if the property is being purchased as a rental property rather than a primary residence.

7. Before approaching a lender for the approval of a loan to purchase the foreclosed property, the following documents should collected by the borrower (if applicable) in support of the loan application: credit report, bank and pay statements for a three-month period, bankruptcy documents, credit card statements or loan coupon books, W2 forms and tax returns for two years, property tax statements, utility company credit rating, income statement, driver's license and Social Security card, car titles, statements pertaining to retirement benefits, stock or IRA accounts, 1099 forms, credit card statements and corporate tax returns.

References

• Realtytrac: 5 Steps to Buying Foreclosures
• "Investing in Real Estate"; Gary W. Eldred; 2009
• Findlaw: Foreclosure
• "Foreclosure for Dummies"; Ralph R. Roberts et al.; 2007
• "Cashing in on Pre-foreclosures and Short Sales"; Chip Cummings; 2009