When it comes to financing investments in foreclosure properties, there are several options open to buyers. These include the following:
Investors relying on bank financing to purchase a property in foreclosure should expect to have a preapproval letter from a lender prior to bidding on a property. The letter will detail the amount of the loan, which is based on an evaluation of your credit score and income.
“The problem is, buyers want to find the house first, and then they think they’ll work out the financing,” says Robert Jensen, broker and president of the Rob Jensen Co. in Las Vegas. “But the problem is, the really good deals on these bank-owned, they go quick — and the buyer doesn’t necessarily have time to try to work out the financing afterward. They need to work that out first.”
Getting a Bank Loan
Investors should not expect the bank foreclosing on the property to approve a loan for the same property, since the bank will view the property as a bad asset. Also, foreclosed properties are usually sold as-is, therefore investors should not expect a discount to compensate for repairs.
Before you bidding on a property in foreclosure, investors should have financing in place. Banks and federal programs will require that investors be qualified for financing before approving a new mortgage loan.
For FHA-insured HUD properties, prequalification and preapproval for another FHA loan is possible. If the HUD home is non-insured, investors should review the FHA’s 203(k) rehabilitation loan or opt for other financing. When attending an auction, bidders should have the required down payment and pre-approved financing.
If your bid is successful, you will need a cash or cashier’s check deposit for the down payment. You will then have 10-30 days to pay the outstanding balance.
Hard Money Financing
Investors can use to hard money financing from private lenders to buy properties in foreclosure. Private lenders may provide short-term loans for fix and flip projects. These loans generally provide financing much more quickly than a bank or traditional lender, often in as little as 5 business days. Investors requesting loans from private can avoid dipping into their own capital to purchase property, however these loans are expected to be paid back quickly, following the sale of the renovated property.
Hard Money Financing Structure
Hard money lenders will expect the entire property to serve as collateral for the loan, since hard money loans only cover 60 to 70 percent of the property’s post-repair value or its current market value.
Hard Money Financing Terms
Interest rates on hard money loans range from 12 percent to 18 percent or higher. These loans are amortized over 15 to 30 years but usually have a balloon payment attached after the first one or two years.
Hard Money Loan Default
Hard-money loans usually include a default interest rate clause that automatically increases the interest rate in case of default. For example, the rate can increase from 15 percent to 29 percent in some states, sending a monthly mortgage payment from $1,264.44 to $2,417.11. Also, the period to cure the default on a hard money loan much shorter than a traditional mortgage loan.
Hard Money Foreclosure
Hard-money lenders will quickly foreclose on a property if the homeowner fails to cure the loan. Given that the property itself serves as collateral, any amount of the loan that was reimbursed will be forfeited.
Deed in Lieu of Foreclosure
Hard-money lenders may offer a deed in lieu of foreclosure, allowing the homeowner to surrender the property to the bank and avoid foreclosure. This ensures that the homeowner’s credit rating is not negatively impacted.
Private lenders can also include like minded individuals, such as business associates, friends and family, who choose to pool their money to finance real estate transactions. These investments in foreclosure properties usually require a down payment of 50% percent or more, and carry higher interest rates and fees compared to traditional financing.
A common arrangement when investing in foreclosures is to partner with other investors. The parties involved will want to sit down and negotiate an agreement that stipulates how the profits of the joint venture will be shared. Usually, investment partners play a passive role in the process and only expect a share of the proceeds after the property is sold.
Aside from friends and family, investors can also seek out professional investors that specialize in hard money loans with higher interest rates.
According to Investment Properties, an online investment site, “The most common way to increase leverage is by using other people’s money by taking out loans – at a good, meaning low interest rate. However, in this situation, the lender generally holds all the power, because you are being held responsible for their money and you are subjected to the consequences if the investment property deal falls through in some way.
“But there is another way, and that is by taking on a partner (or more than one) rather than a lender. With partners, it is possible to share the responsibility a bit more, and you are more flexible in how the investment is made and how the profits (or losses) are distributed.”
Cash purchases are the preferred means of payment amongst bank since they entail less paperwork and fewer long term complications. Buying a foreclosure property in cash means there will be no monthly loan payments, and buyers will avoid interest expenses and closing costs associated with financing. Cash buyers can also negotiate a quick closing on the property since the additional time involved in obtaining financing is eliminated. If they need additional funds after the purchase of the property for repairs and renovations, they may qualify for home equity financing.
The following steps should be adhered to when buying a foreclosure in cash:
Find the Legal Owner
To find the legal owner of a property in foreclosure, investors should contact the bank directly. You can also check with your county’s tax collector’s office for records on the property title. The bank may also refer you to the asset manager in charge of the property, who can refer you to the agent handling the sale.
Assess the Property
Research the value of the foreclosed property by doing a comparative market analysis. The goal is to price the property in accordance with similar properties sold as distressed properties or short sales, rather than the fair market value.
You should also inspect the property to examine any damage or needed repairs. If the utilities have been shut off, ask the lender if they can be turned on for the inspection. The estimate how much it will cost to repair the damage or replace missing appliances, as well as the cost of trash removal.
Make An Offer
After the market analysis, decide how much you are willing to spend on the property, taking into account the home inspection and the time the property has has been on the market. Each state provides form to make a formal offer on foreclosure properties. It is important to clearly state that the purchase will be made in cash.
It is necessary to have bank statements on hand that show you are able to make a cash payment. The offer should also include a sizable deposit and state that you would like a quick closing. Then wait for your offer to be accepted by the bank and for the title company to fast-track the closing.
Fannie Mae HomePath Program
The Fannie Mae HomePath Program offers mortgage financing for its foreclosure properties through its HomeReady financing program. The program allows down payments as low as 3%, with no minimum contribution required from the investor for low- and moderate-income households.
“During the foreclosure crisis, we had many properties come back to us,” says Julia Dugger, Director of Marketing and Agent Performance at Fannie Mae. “Suddenly, we were a very large player in the primary market.”
The HomePath program maintains, upgrades and sells properties that have been foreclosed by Fannie Mae through a network of contractors and agents across the United States.
“We are a huge consumer of paint and carpet to freshen [the houses] up. No one will want to pay full price for a house that looks like the foreclosure on the street,” says Dugger, “We want someone who is moving into the home to stay there and care for it.”.
HomePath.com lists the foreclosed properties in each state.
VA Vendee Financing Program
The VA Vendee Financing Program offers veterans and non-veterans with less than perfect credit scores. Vendee financing is available in two terms – a 15 and 30 year fixed rate with a funding fee of 2.25%. Owner-occupied properties can be financed with as little as 0% down, and non‐owner occupied properties can be financed with as little as 5% down. Investors can also use 75% of the anticipated rent to offset the monthly payment. There is no limit on the number of investment properties that can be purchased.
These are the guidelines to apply for VA Vendee Financing:
- Military and civilian buyers alike can apply for Vendee Financing
- Owner occupancy and non-owner occupancy allowed
- Homes to be owner-occupied can be obtained with as little as zero down
- Non-owner occupancy requires 5% down or more and property management experience
- Seller can pay up to 6% of the sales price in closing costs
- VA Funding Fee is 2.25%
- No private mortgage insurance
- No prepayment penalties
- Appraisal is not required for underwriting
- Vendee Financing can be obtained directly through the Veterans Administration
- For non-owner occupancy, there is no limit to the number of investment properties
- Vendee financing has 15- and 30-year fixed-rate terms
- VA REO properties are sold “AS IS” at or below fair market value
To list foreclosure properties, the VA applies a Simultaneous Offer Period that runs for 10 days after the listing date. All bids are opened considered after this period as if they had been received simultaneously. If no bids meet the minimum requirements, the property will stay listed and all future bids will be treated on a first-come, first-serve basis.