How to Buy a Foreclosed Home

Everyday there are more and more foreclosures available in the housing market. However, with more and more foreclosed homes going up for sale, eventually more and more buyers are going to grab them because they are dirt cheap. Read this article on how to prepare to get your own great deal before the housing market rises again!

Difficulty: Challenging

Instructions

Things You'll Need:

• Lender
• Realtor
• Homebuyer Seminar
• Patience
• Earnest Money
• Appraisal Money
• Inspection Money

1. Buying a house, especially your first one, is always frustrating and emotionally draining. Buy a foreclosed house, especially as your first one, is mind-numbingly horrific and absolutely worth it! I have listed the exact steps I have taken on my two month long trek to becoming a first time home owner. I got an amazing deal (more than half off of what the house is actually worth or what it even sold for two years ago). I would also like to state that I live in Minnesota (as every State and prices will vary).

2. The first step is to gather my finances to decide if I’m ready. Owning a home is NOT cheaper than rent (no matter what anyone tells you). There’s Escrow (house insurance and property tax), Payments and Interest, there’s water, electricity, trash, and maintenance on your own property.

3. The second step is to meet with a Lender. I shopped around at two different lending companies (one that I work for and another rival company). In the end, the company I worked for had the best deal for me (cheaper closing costs’ and discounts). My Lender referred me to work with one of their Realtor’s, however, I had already found mine by sheer luck (I had inquired on one of his properties, and he turned out to be GOLDEN during my long path to homeownership). While meeting with my Lender, I had to bring her the following:
   -W2’s for the past two years
   -Most recent pay stub
   -401K documents
   -And the last two months account statements
   
   Afterward she looked over my information and pulled my credit score, she listed programs that I qualified for. There are numerous housing programs out there- to find the best ones that fit you and what your options are, will be to look at your local bank’s website, ask the Lender, or to take a Homebuyer’s Seminar where they will give the information to you. A Lender is great because they can tell you if you bought a house for ‘X’ amount and the property taxes are ‘X’ amount, how much are you looking at monthly with escrow and payments with interest. A Lender can also tell you your expected closing costs’ on a certain house range to pre-pare you.
   
   If you will be involved with an assistance program, most of them will require you to take a Homebuyer Seminar. These are given typically by non-profit agencies and you can sign up for a certified program either on-line with your County/City or your Bank should know where to refer you. If you need more information on Assistance with buying a house, please see my article: “How to get assistance to buy a house”.

4. For a week after I was Pre-Approved (NOT Pre-Qualified) I shopped around on-line to find which house I would want. All of them ended up being foreclosed homes. Once you have made a list of at least five homes, go to your Realtor and have them set up a time for you to go see them.
   
   Houses you should look at:
   -One in the low end of your budget
   -One in the middle of your budget
   -One at the maximum of your budget
   -And two that you are interested in, but it’s a maybe.
   
   Some things to keep in mind when you go see your houses is that these foreclosed homes might not have electricity (turned off) or no light bulbs, so be sure to go in broad daylight. If you go in the winter time, most of the houses (if you live in a colder region) will be winterized, so the faucets won’t work as they’ve been turned off. Also- be sure to bring a camera with you.

5. Once you have found a home, the next process will be contacting your Realtor and having them draw up the Agreement forms for you to sign and give your Earnest check to your Realtor at this time. Be sure to tell your Realtor to have your Earnest check protected for you in the case where you can’t secure financing, you’ll get it back. I will discuss this part later. Now you wait for the Seller to agree to your terms or send you back another offer, which you can still negotiate or accept. Sometimes a Seller will simply decline your offer. This generally happens if the Seller already has numerous offers on the same property and is no longer accepting anymore offers. Your Realtor should be able to inform you if there are other offers on the same property. Or, at times, if the Seller simply doesn’t like your offer and doesn’t want to send an offer back, they can simply say “No”. When you put in an offer for a house, make sure your Realtor is experienced enough to be able to get the Seller’s to pay for your closing costs. In this housing market, almost always the Seller’s will be willing to pay for your closing costs if you don’t low-ball them on the asking price.

6. Once the Seller has accepted and signed the Purchase Agreement forms, you are set to go to your Lender! Your Realtor will send the documents to your Lender who should look it over and note if the Seller’s are willing to pay for your closing and pre-paid costs. Once your Lender has looked everything over, you will meet up with them again to sign more documents and at this time, order your Appraisal and (optional) house Inspection. Appraisal’s run around $350-$450 and a house Inspection runs around $300-$400. You are required, per the bank, to order an Appraisal (which you get the money back at closing). However, the Inspection is up to the Buyer (you) if you want it done and you won’t get that money back. An Appraisal is required so the Bank knows that the money they are lending you is worth it. The Appraiser will go out to the property and evaluate the worth of everything to make sure it matches the asking price. The Appraisal should run around the same as what you’re buying it for. The Appraisal must take place 3 business days after the Purchase Agreement has been signed by both parties (unless noted other wise in your Purchase Agreement).

7. A word for the wise: Work Order.
   
   IF your Appraisal comes back and you have work orders to complete- you will have no choice but to do them or you can’t buy the house. Work Orders are things that your Appraiser finds that are not up-to-code or are dangerous. This is where your Realtor should have protected you in the Purchase Agreement so you can get your Earnest check for $1,000 back if you can’t secure financing. My Appraisal came back stating that the deck on the second floor of the house needed to have a railing, the door to the deck needs a storm door, electrical wires need to be capped, and there was a small rectangle hole in the kitchen where the old stove vent used to be (was removed by previous tenants). For all the work, you are required to have a licensed contractor give you a bid on the work. In my case, my Realtor hounded the listing agent to get the electrical wires capped (which they did). I then had a contractor give me a bid on all the remaining work. With that bid- you have to give it to your Lender and your Lender will times that amount by one and a half. Whatever amount your Lender comes up with, you MUST have that money BY closing or you can’t secure financing. The maximum will be $15,000 and thankfully, mine was only $2,200. The great thing with this is that my Earnest check and Appraisal fee that I will get back at closing would have covered more than half of that amount, and I just had to bring in the remaining amount. To clarify: The bid that you got from a contractor, even if it’s putting fifty cent plates over your electrical outlets- you just need a bid. It DOES NOT mean that the contractor’s HAVE to do the work. You can do it yourself and get your money back once all the work is completed and up-to-code per the Appraiser (who will come back to check on your work). The reason why the Bank requires that you pay one and a half times the actual amount from a licensed contractor is because they want to be protected. You typically have 30days to get the work done, and if you don’t- ha ha ha, the Bank has your money! They will hire anyone of their choosing to get the work done and any money left over, they will give it back to you. In the unlucky case where there’s not enough money to pay for the work, it’s you again! You will have to pay more money. Some things that the Appraiser might call you on will be handles going down the stairs (especially in basements) or peeling paint (for fear of lead paint).

8. After you have jumped that hurdle, your next task will be to find an Insurance company. If you have insurance already (such as with your cars or life insurance) you may get a good discount by adding your house. However, now may be the time to give you an excuse to shop around with different agencies. I got four quotes, and they all surprised me. Some of the biggest agencies charged me a LOT. When a well known one, but not too big, charged me the cheapest! People were shocked at my rate. So- you should REALLY look around. I got my house insurance for under $50 with NO car insurance added with them. Once you’ve decided on an Insurance Agency, be sure to give them a document that your Lender should provide you with so they can make sure their policy for you will pass your Bank’s approval.

9. Once that is done, you will want to check up on your Lender a lot to make sure you’ll still be closing on time. Most Purchase Agreements will state that if YOU’RE team causes closing to be delayed, you will charged $150 a day until you close. But if the Seller is late with closing- they don’t get penalized. Of course- this will vary depending on your own Purchase Agreement. My closing was pushed back twice. On the third time, I wasn’t even happy anymore to close. I was so frustrated and annoyed I could hardly crack a FAKE smile at closing. The first time my closing was pushed back was because the Seller didn’t have everything in with the closing title. Because the property I bought is a foreclosed property, we only have two in the State of Minnesota who can close it. The second time, my Bank wasn’t ready because their HUD required a 24-hour turn around time. Which at this point, my “always-prepared” Realtor had me and the Seller sign an Addendum (attachment to the original Purchase Agreement) that we could close a few days later than the previously agreed closing date so I wouldn’t get penalized for the $150 a day. The third time, it finally happened. I closed. I was skeptical all the way to the end where I was finally in my car and getting ready to go to my new house. I kept expecting at any second that my closing would be canceled- again.

10. Closing is not even the end of it, either. Afterwards, you should go to your local Homestead agency and get your foreclosed house marked as you bought it and it’s occupied so your taxes won’t hike up. You should also get your property re-assessed at this time by calling your County to get it done and be sure to always have your Work Orders completed in time.
    
    Through it all- it was worth it.
    
    
    Good luck! (I mean it. Not sarcastically either).

Tips & Warnings

• Be sure to find a seasoned Realtor. A seasoned Realtor is someone who has braved the storm since the crash of the housing market. You just ask them for their credentials and they should be in the business for a few years and have some experience buying their own home or experience working with foreclosed homes. I was lucky enough on my first hit to have found my amazing Realtor who was in the business for five years and used to flip houses for a few years so he knew price ranges for work that needed to be done and what to look for in buying a house.
• Make sure the Lender that you choose knows about the Assistance programs available or has a team that s/he works with. Also, make sure this Lender has been doing their job for a long while. It will better your chances at closing on time.
• Make sure you are PRE-APPROVED, and NOT Pre-Qualified. Anyone with a heart beat, a job, and old enough can be Pre-Qualified. Pre-Approved gives you more of a guarantee that you will be able to get financing for the maximum amount you’re approved for. Pre-Qualified does not guarantee you anything.
• An Earnest check for foreclosed home is typically $1,000. They can run up to 2% of the asking price, but most Seller’s are willing to agree to a $1,000 Earnest check (will be in the form of a Cashier’s check). You do get your Earnest money back at closing- IF you close on the house.
• When you put in an offer to a Seller, because so many houses are in foreclosure, the Seller will be a bank. There are times when you might have to wait a couple of days or even a couple of months to hear a response. You must be patient or else simply move on.
• Purchase Agreement: The set of documents that you and the Seller have agreed to. These documents will include how much you or the Seller will be paying during closing, the closing date, and all other preliminary information (such as you won’t be obligated to buy the house if a tree falls on it and you haven’t closed yet, etc).
• Escrow: Escrow can be part of your monthly payments for your mortgage. It is strongly advised for you to have Escrow attached to your monthly payments to the bank. Escrow consists of your property taxes (broken down to 12 months, equaling one year), your house insurance, and for the first two years, the insurance on your loan. So- you will be paying in one lump sum: your principal (amount on your loan), interest from your loan, and escrow.
• NEVER order an Inspection until you absolutely have your signed Purchase Agreement forms back from the Seller. My Lender told me that it has happened twice in the recent months where she had two different buyers too anxious to buy a certain house and ordered the Inspection only to find out that the Seller agreed to another party to get the house. This resulted in the buyer’s losing their money on an Inspection for no reason.
• When you are looking at a house, make sure that it’s not on the Vacant List. If so- you’re in a world of pain and frustration to get it off that list (a lot of work on the house will be required).
• You should also look for the Truth-In-Housing that is included in every house that is up for sale because it will list anything and prepare you for the Appraisal and what the Appraiser might call out as hazardous or unacceptable for funding.