Foreclosure

Financing Foreclosures

Real Estate Opportunity

Mortgages options have evolved over the last ten years, having dual effects: providing opportunities for more real estate buyers and an increased risk of foreclosures. Today, just about anyone seeking a mortgage can successfully find a program to accommodate a variety of situations and/or circumstances. From low FICO scores to no money down programs, the possibilities are endless. Therefore, obtaining financing for foreclosures is not as complicated as one may think. The programs will differ depending on the variables involved in the transaction, but the options do exist.

There is however one variable, “bailouts,” that majority of the financing institutions consider a major negative. A bailout involves a transaction where the current property owner is behind on the mortgage payments and the foreclosure process has begun. In an attempt to savage the property, the owner finds a fictitious buyer to bail them out of their current situation by purchasing the property. Usually in a bailout situation, the property owner that was in foreclosure continues to reside in the property and make monthly payments to the buyer until they are able to repurchase the property. The buyer may negotiate a fee and/or rental income that yields a monthly cash flow. Savvy Investors can be very creative in these circumstances to lower risk, while creating a win-win situation for all parties.

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I know you are thinking, how will the financial institutions know if it’s a bailout situation? Good question—the only way the financial institutions will know about a bailout situation is if there isn’t an “arms length” transaction. An arms length transaction is one where the seller and buyer are related or associated in some form or fashion. This is usually determined if the parties have the same last name or if a similar relationship can be proven. If not, and the new buyer qualifies for the loan program, the transaction is a go.

Additionally, there are some other limitations when looking to finance foreclosed properties which may vary from one financial institution to the next. Some financial institutions require that the property is titled to the bank for a minimum of 91 days. Others require that the property be listed on the Multiple Listing Service (MLS) and the buyer may be required to have agency representation. Yet other programs state that the seller cannot contribute toward closing costs. More detailed requirements want the loan to be processed in an Automated Underwriting System that defines the risk in the area where the property is located and a suggested value. If there have been multiple foreclosures in a given area, the property will most likely have a declining value. If the value defined by the system is lower than the appraised value, the buyer will have to pay an additional fee for a third party Broker Price Opinion (BPO). The BPO report is usually done by a local realtor or specialist who has a vast knowledge of the area where the property is located. The financial institution will compare the findings from all three reports to comprise a value that will be used to determine the loan amount. This process may not yield a value that is financially beneficial to the buyer and/or the seller, which could essentially destroy the deal.

During your quest to secure foreclosed properties, another option may be to look into Real Estate Owned (REO) properties. REOs are foreclosed properties that were not sold at the foreclosure auction and are still owned by the financial institutions that held the previous mortgages. Now as you know, financial institutions are in the money business and not the buying and selling of real estate business. In the instance they acquire real estate, the ultimate goal is the get rid of the property and recoup their financial losses on the defaulted mortgage. They normally hire a real estate broker to assist with the sale of the REO properties. Some financial institutions even post their REO properties on their websites. Buyers interested in purchasing these properties should first attempt to obtain financing from the financial institution that holds the property. This information can be obtained from the listing agent or public records. If the buyer qualifies, a considerable amount of money on closing cost can be saved and/or financing at a slightly lower interest rate may be obtainable.

Foreclosed properties that are held by the Department of Housing and Urban Development (HUD) and have mortgages that were insured by the Federal Housing Authority (FHA) is another option. As with REO properties if the buyer qualifies for an FHA loan substantial savings on closing costs are available. Unfortunately FHA loans are not accessible for Investors, but this is definitely an option for those seeking owner occupied properties. However, be advised that some HUD foreclosed properties don’t meet the requirements and/or standards for FHA mortgages. As you are probably aware, sometimes foreclosed properties have been trashed by previous owners or experienced major deterioration due to neglect. In these instances, the properties don’t meet the financial institution’s program requirements and in some cases larger down payments are required. However there are financial institutions that offer programs that advance funds to cover the purchase and renovation of the properties. These are called renovation loans and they can be used for owner occupied and investment properties. HUD offers the FHA 203K renovation program that can used for owner occupied 1 to 4 units, FHA approved condos and mixed-use properties. Now Investors, don’t get discouraged because there are programs for you as well. These conventional renovation programs resemble the FHA 203K program, with more flexibility and less limitations. For Investors, these programs may require a higher down payment than standard conventional loans, but they do have their advantages.

As you can see, there are many different variables, some not discussed here, that may be involved in financing foreclosures. The requirements and criteria will vary depending on the financial institution and the program. However as stated in the beginning, you can successfully find a financing program to meet just about any situation that may arise. Simply contact a qualified broker or loan officer for assistance.

Written by: Anita Clinton, Staff Writer