Is it possible to get a mortgage on a house bought at a foreclosure auction? This article describes how to do it right.
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Requirements to Mortgage a House Bought at a Foreclosure Auction
It is definitely possible to get a mortgage loan on a house that was purchased in a foreclosure auction. When a house is sold at auction, the prior owner and the previous mortgage lender no longer have any stake in the property. This means that there are fewer factors preventing the new owners from getting a mortgage on the house.
The Owner’s Purpose
The buyer’s intention behind the purchase of a house at foreclosure auction is a key factor. Whether the house will be used as the owner’s residence or as an investment property, or just to flip is an important consideration.
Certain mortgages such as FHA-backed loans require the owner to live in the property as his or her primary residence.
Mortgage lenders assume that owner-occupied homes are more likely to be well-kept, and thus more valuable, as opposed to investment properties.
The Home’s Physical Condition
Homes in poor condition are less likely to be approved for a mortgage than those in good condition. Banks are only interested in accepting houses in marketable and habitable condition as collateral for mortgage loans.
When you apply for a mortgage, the lender will alway request a home inspection, or documentation of a recently completed inspection. This must show the home meets building and occupancy codes and does not have major physical issues.
Houses purchased at foreclosure auctions vary widely in condition. If the home has no major structural issues and handily passes the building and occupancy codes, then there should be no reason a new owner cannot get a mortgage on it.
Conversely, if the home has holes in the roof, sub-standard wiring, fire damage, pests, vandalism damage or a host of other “livability” problems, then banks will be reluctant to accept it as collateral for a mortgage.
The Owner’s Credit
Generally speaking, it’s possible to get a mortgage even with bad credit. The interest rate may be higher than what you might get with good credit. But there are plenty of lenders willing to finance owners with poor credit.
This is because the home (if it’s in good marketable condition) secures the loan. If the owner doesn’t make payments on the mortgage, the bank can foreclose and repossess or auction the home off to recover its loan amount.
When the economy is strong and home prices are rising, banks will take more risk on low-credit borrowers. When the economy is week and home price are declining, mortgage lenders will have stricter criteria for whom they lend to. The amount of equity in the home must be higher.
If you’re buying a house at a foreclosure auction, it’s important to consider your credit rating and financial position before applying for a mortgage.
Differences between a mortgage on a foreclosure auction home and a mortgage on a home not in foreclosure
Foreclosed homes are commonly in bad condition, and the physical condition of the home affects its qualification for mortgage financing.
Foreclosed homes are sold “as is” which means the previous owners take no responsibility for any issues that may occur in the future. There could be unrecorded contractor liens, a second mortgage lender to pay off, etc.
Homes that have not gone through foreclosure are more likely to be in better physical condition. This means they are perceived as a more stable investment (and better collateral) for a mortgage loan. Mortgage rates will be lower and you can get more favorable terms.
How to Get a Mortgage on a Foreclosed Home Bought at Auction
The Cash Out Method
Getting a mortgage on a foreclosed home bought at auction allows the buyer get cash out and finance the property at a favorable rate.
Here’s what you do:
- Buy the property at auction with cash (or working with a hard money lender or other private capital lender)
- Clear any liens
- Rehab the house to make it marketable
- Then take out a mortgage on the property and get cash out
A solid financing plan is essential in the foreclosure auction market because often other potential buyers are large investors with lots of cash.
The cash out method allows you to concentrate your available cash to win the auction and pay for the house. Then you cash out later to get your capital back once the rehab is done.
203(k) Loans
You should also look into a 203(k) Loan. These loans are federally insured and allow for rehab costs to be included in the loan amount. This type of loan is ideal because foreclosed homes are often in need of significant repair.
This article discussed how to get a mortgage on a house bought at a foreclosure auction. If you follow these steps, you should be able to buy and flip more houses with less cash.
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