While you’re searching for your first or next house, you may happen upon one for sale that was foreclosed on the previous owner.
Now that it’s been about 10 years since the housing crisis and the market has long recovered, foreclosures aren’t as prevalent as they were a few years ago.
But there will always be homeowners who fall behind on their mortgage payments and have to vacate, even in good economies. And this even happens with larger homes in nice neighborhoods, the kind that physicians and residents might be in the market for.
So if a foreclosure has all the characteristics you’re looking for, should you consider buying it?
The main appeal of a foreclosure is buying a home at less than what it’s market value would be if the occupant was selling it. This is especially true in a seller’s market where home prices are accelerating.
Foreclosures are typically owned by the bank or lender that financed the mortgage that its owners were unable to pay. Therefore, the bank has an asset on its books that it wants to sell as quickly as possible. Many are put up for auction.
Banks are in the business of loaning money, not owning property. Therefore, a home that’s been foreclosed will likely sell for less than a comparable property being sold by its owner-occupant.
Another advantage is that foreclosed homes are typically empty. This means you can often move in a lot sooner than if buying a traditional home.
You will need a preapproval letter from your lender detailing how much they will provide in financing, as well as their assessment of your credit and income. The bank selling the home does not want to waste any time on a deal that eventually falls through. They want to know up front that you have the money available for purchase.
However, there is added complexity involved in buying a foreclosure that can add to the cost of buying the property and require more time commitment that a busy doctor can handle.
There is little to no negotiation in the sale of a foreclosure. The bank owner has already priced it to sell quickly while recouping its investment, so it won’t accept lower offers.
Foreclosed properties are sold as-is. You can — and should — conduct a home inspection before making an offer, at your own expense. But the inspection is only for your knowledge and for your lender’s underwriting purposes. The results can’t be used to negotiate a lower price or repairs from the owner.
The property’s potential condition is one of the biggest downsides to buying a foreclosure.
Since the previous owners fell behind in their mortgage payments, chances are they also failed to properly maintain the home. They likely didn’t fix leaks, repair the broken garbage disposal or ceiling fan, or replace old paint or flooring.
Houses that have been vacant for any extended period of time will develop issues, even if it was well maintained by its previous owner. Gutters could be filled with debris, which could lead to roof and foundation issues. Plumbing that hasn’t been used in months can get locked up. Kids sometime use abandoned homes as a hangout and can cause damage. The lawn and landscaping will not have been maintained well during its vacant period.
If you end up in the market for a foreclosed property, your real estate agent should have experience in these transactions. Because of the complexities involved, you will need an experienced professional to guide you through the process.
In addition, a qualified agent can help you understand whether you’re saving enough on a foreclosed home to make it worth the trouble or whether you would be better off with a traditional house.
Unless the property is in solid condition, it may be difficult to obtain financing. If you’re trying to qualify for a physician mortgage loan, you should check with the lender first to ensure they will even finance a foreclosed property. Many conventional lenders do not finance distressed properties.
There are a couple of issues with financing a foreclosed property. First, any adverse conditions will negatively affect its appraisal value, which mortgage loans are limited to.
Second, a lender's underwriters will require certain repairs be made before the releasing the funds. However, foreclosures are almost always sold as-is.
If you’re a physician or resident, you should be extremely cautious about buying a foreclosed home. If you can find one that has little to no damage or repair needs, then it may be a good way to save on the purchase price. But you should probably avoid a foreclosure that needs a lot of work, as it will hinder your ability to get financing and will cost you time and money down the road.
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Joel Palmer is a writer and personal finance expert who focuses on the mortgage, insurance, financial services, and technology industries. He spent the first 10 years of his career as a business and financial reporter.