Buying Foreclosures & HUD Homes - Part 2
Benefits And Downsides To Buying A HUD HomeBuying a HUD home comes with some notable downsides, including:
Fewer options available to purchase
Houses that may be in worse condition
However, some positives don't exist with a regular foreclosure purchase, including:
The option to acquire a 203(k) loan from HUD for repairs
Discounts available in revitalization zones
Additional HUD discounts for teachers, firefighters, police officers, and several other emergency and government workers purchasing in Revitalization Zones
Buying A Regular ForeclosureThe process of the purchase of a regular foreclosure is similar to buying from HUD, with some notable differences.
Short SalesShort sales, or pre-foreclosure sales, are a type of foreclosure sale where the current owner still owns the house but is selling it to avoid foreclosure and the negative credit history marks that come with a foreclosure. In this scenario, the seller has to agree to a sale price, making it harder to purchase. Low-income buyers will have a particularly difficult time, as FHA loans are typically limited, and low-income buyers will have less negotiating power.
AuctionsAuctions occur when the homeowner refuses to accept pre-foreclosure, and the lender refuses to accept lower payments. Then there's an auction, where the owner may get the liens paid if enough money is put down on the home. The auction starts with a minimum selling price that often covers some or all of the amount owed. Low-income buyers can expect that they will not be able to participate in most auctions. Most auctions are cash-only, meaning loans are not accepted. Few low-income families will have the cash on hand to purchase at auction.
Real Estate OwnedIf auctioning fails, the lender takes full possession of the house. At this point, competition is high, as this stage offers the lowest price. The difficulty here is that those offering more money than the minimum may price out low-income buyers. Additionally, these houses may only stay in the market for a short amount of time, which may not give low-income buyers enough time to acquire a loan. As these homes are often listed at a low price, there is typically little room for negotiation, unless you're attempting to pay more than the asking price.
Foreclosures: A Good But Risky OptionForeclosures are one of the best options for low-income buyers. HUD homes, in particular, make it very possible for low-income families to buy a house, even in neighborhoods that were otherwise unaffordable. However, distressed sales such as foreclosures are always a risk. The homeowner's inability to pay on the mortgage typically means that they were also unable to put money into proper upkeep. Problems may exist that you don't discover until after moving in, some of which can be very expensive to fix.
Regular foreclosure sales may effectively lock out low-income buyers due to competition, pre-approval requirements, or how quickly the homes leave the market in general. When buying a foreclosure, consider whether you are ready to accept both the risks involved and the notable chances of failing to get an accepted bid.
Buying a foreclosed home is one of the cheapest ways to become a homeowner. As with most good deals, though, the competition is likely to be fierce, and many of those competing to buy will be well-funded institutional buyers accumulating property for resale or rental. It's a possibility worth considering, but you should go into the market with a clear idea of what it requires.