If you are trying to score a home for a good deal, consider looking at a pre-foreclosure home. A home with this status is on the verge of going through foreclosure, but the bank hasn’t quite pulled the trigger yet. The owner usually has the opportunity to sell the home before the bank forecloses on their property. This can help the seller save their credit score and prevent the need to wait three years before they can buy another home.
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Buying a pre-foreclosure home requires a little more work than buying a standard home for sale. Keep reading to learn what it entails.
Get a Pre-Approval Letter
Before you start looking for homes, you should take the time to get pre-approved. This means that a bank looked at your qualifying factors and approves you for the loan, but with conditions. The conditions usually pertain to the property, but they may also include things like a final verification of employment, credit, and your income.
The pre-approval letter is usually good for 60 – 90 days, so you need to act fast. If you find a home you like, you can bid on it and get the ball rolling right away. This can also help prevent you from losing the home because the seller was able to get caught up on their mortgage. While this situation is rare, it can happen, so you need to be aware.
Find the Right Home
The first step is to find the right home. It’s a myth that all pre-foreclosure or even foreclosure homes are in distress. Many homes are in perfect condition. The owner just can’t afford the mortgage any longer. At this point, the bank has sent them a letter of their intent to start foreclosure proceedings. They usually let the owner have two or three months to figure things out and either bring the account current or work out a payment plan. Some owners opt to sell the home, sometimes as a short sale, in order to avoid foreclosure if they know they can’t get current on the loan.
You can find pre-foreclosure homes in various ways including:
- The newspaper
- Online real estate websites
- Your realtor
- Public records for your county
Sometimes the home won’t even be for sale, but with the right offer, you may be able to convince an owner to sell rather than trying to figure out how to get ahead on the mortgage. Remember that the seller probably won’t be willing to make any changes to the home. If you find things wrong with it, they are likely going to be your responsibility. If the issues are bad enough, though, the home may not pass a standard appraisal. If this is the case, you may need a renovation loan, such as the FHA 203K loan, which provides funds for the purchase as well as the repair/renovation of the home.
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Sign a Contract
Once you find the home you want and you’ve completed the negotiations, make it official with a purchase contract. Once you have a signed contract (by all parties) you can turn it into your lender who can then complete the underwriting process on your file.
The lender will order an appraisal and title work on the property. They need to know that the home is worth at least as much as you bid on it. They also need to know that the home is in decent enough condition. The title search will let the lender know if there are any other liens on the property. If there are liens, the seller will have to take care of them before you can buy the home.
Finish Underwriting and Close on the Loan
The only steps left are to finish the underwriting process and get to the closing. If you took the time to get pre-approved, you should be able to get to the closing table in 30 days or so. If there are any bumps in the road, you can deal with them head-on and get to the closing table as fast as you can.
Keep in mind that lenders will re-verify your employment and credit right before the closing. This is important to remember so that you don’t lose your approval because you changed your circumstances after getting preapproved.
Buying a pre-foreclosure home is generally easier than buying a home already in foreclosure. Banks are usually grateful for the escape from the foreclosure proceedings. Sellers are often grateful that they don’t have to undergo foreclosure, which would damage their credit and prevent them from becoming homeowners for at least another three years. In the end, it’s a win-win situation for everyone involved.