Should I Buy a Foreclosure for My First Home? What to Expect

Should I Buy a Foreclosure for My First Home? What to Expect

Posted on Aug 07, 2023

As home prices (and mortgage rates) have soared, first-time homebuyers are looking for alternative ways to get their first home. 

Foreclosure is something a lot of people are curious about—they’ve heard that foreclosed properties are cheaper, and they’re wondering if they could catch a deal. 

We’re going to cover the basics of buying a foreclosed property, how you can find them, and several alternatives that may work better for your situation.

Here’s what you need to know.

How buying foreclosed homes works

A foreclosed property is a home that has already been repossessed by the lender and is now being auctioned off so they can recoup their costs. This is different from a short sale, in which the lender agrees that the homeowner can sell the home for less than what they owe.

Once a home goes up for auction, you can either find it on online auction sites or on websites that list local foreclosed properties, like

Many first-time homebuyers look for foreclosed homes expecting a discount for an otherwise good home. Keep in mind that over the past few years, rising home values have increased the equity most homeowners have in their homes—meaning that most of them can afford to sell their homes the traditional way. A foreclosure only happens when you can’t make the payments and you can’t sell the home for enough money to cover what you owe.

By the time a property is foreclosed, it’s often in a state of disrepair and may have stood abandoned for some time. If someone is struggling to pay their mortgage, they’re typically going to prioritize that over paying for roof repairs. 

So consider what type of home would likely go up for foreclosure in these circumstances—they will likely need a lot of work. You should be comfortable with the idea that your home will need renovations—potentially immediately.

As real estate expert Steve Harney points out, we're unlikely to see a ton of foreclosures anytime soon because homeowners today have so much equity in their homes.

Why are foreclosed homes so cheap?

Auction foreclosed homes are cheap because they are riskier investments and not eligible for traditional home loans, so the pool of buyers is smaller.

 If you buy a home at auction it is typically a quick, cash-only transaction. Most of the time you will be buying the home “as-is” and without an appraisal or an inspection. In all likelihood, you won’t even be able to enter the home before you buy it.

The title might not be clear—so you may need to spend money to pay off the liens on the property. For a foreclosed home, this likely means paying unpaid property taxes. One of the reasons you get a discount is because you willingly take on these headaches.

Every auction is different—some will be in person, others are online. To find one, just google the name of your city + sheriff’s auction foreclosed homes. While getting the cash required to buy the home can be difficult, this is where you’re more likely to find the great deals and discounts that typically draw people to research foreclosures in the first place.

REOs: easier to buy

If the home goes to auction but fails to sell, the lender will take possession and sell it as an REO (real-estate-owned property). With an REO you can use conventional financing, have 30+ days to close, you can inspect for informational purposes, negotiate terms with the bank, will receive a clean title, etc.

Although REO homes are easier to obtain because they can be purchased with a conventional mortgage, you don’t see the huge discounts that you’d see with auction homes. Instead, homes come in a lot closer to their true market value since they are a lot less risky for homebuyers.

How to finance a foreclosed home

If you’re wondering what kind of loan you need for an auction foreclosure, it’s complicated. You won't be able to use a traditional loan since there is no appraisal, no title search, and the home might not be in liveable condition yet. All of this creates too much risk for lenders.

Typically, people either have the cash on hand or finance the purchase through their existing savings/using existing assets like a 401K. If you already have a home, instead of selling it, you can take out a loan against your equity in order to buy the foreclosed home. Or if you have trusted friends/family, you can borrow the money through a personal loan. 

If the home is a short sale, you can buy it with a conventional loan. A short sale, though, means the foreclosure technically hasn’t gone through yet.

How to find your foreclosed home

Many foreclosure auctions take place at a sheriff’s sale, which typically (but not always) are online. You can look up current foreclosure listings in your area by using a site like HomeRise and filtering by Listing Type.

As you can see, you can checkmark for pre-foreclosure, auction, or REO/bank owned.

Foreclosed home

Although you might read a lot about buying pre-foreclosed homes, let’s be clear: the chances of you landing one are extremely low. A pre-foreclosure means that they haven’t lost the home yet and may never lose the home. 

Can foreclosed homes be negotiated? 

If you purchase an REO home, you can sometimes negotiate the terms with the lender (though don’t expect any big discounts—the lender is trying to get the home off their books and has priced it to sell). 

If you purchase a home at auction, you won’t get to negotiate since the highest bid wins.

So: Should I buy a foreclosure for my first home?

If it's your first time buying a home, foreclosure might not be the way to go. It can be harder to finance foreclosed homes, especially the auction homes that are the most affordable options—and foreclosed homes can often come with a lot of extra work that not every homebuyer is prepared for.

If you do opt for a foreclosed home, an REO can be easier to finance and comes with less risk.

What other options do you have for finding an affordable home?

  • If you're not already working with a real estate agent, now's the time to start. It comes with zero cost to the buyer, but they may have insight as to how you could knock down the monthly mortgage payment. How Much Money Do You Need for a $200k House? Let's Break it Down goes into this in detail—you can spend hundreds less per month for the same $200,000 house, depending on your zip code, mortgage rate, and more.
  • Look to new construction homes, even if you assumed they were out of your price range. Home builders can often offer much lower rates than what you'd get on an existing home—allowing you to buy a more expensive house than you'd normally be able to.
  • Research existing grants and forgivable loans for your local area. First-time homebuyers can often get much of their down payment and/or closing costs covered. Sometimes these grants are given on a first-come, first-serve basis (and once they run out, that's it for the year), so it's a good idea to know when they renew each year so that you can home search around that time.
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