Getting Financing to Buy Foreclosed Property

Written by
David Mully
Read Time: 4 minutes

The current foreclosure crisis has created some significant opportunities for those who'd like to try investing in foreclosed properties. But with credit as tight as it is, how can you get financing to buy a property to invest in?

Getting a mortgage to buy a real estate-owned (REO) property, as they're known in the industry, is similar to getting a mortgage for a home you plan to live in. But there are differences. For one, you'll likely pay a higher interest rate. Lenders may also want to see more details on your finances, particularly if you're planning to use rental income to make the mortgage payments. Finally, there are some programs designed for owner-occupants you won't be able to qualify for as an investor.

The first step is to find the right property. A lender isn't likely to help you buy a foreclosed property for investment purposes unless it appears to be a good investment. So you need to do your research first. If you've never tried investing in property before, you should spend a few months learning your local real estate market and identifying potential areas to invest in.

Get prequalified first

Before trying to buy a foreclosed property, you should try to get prequalified with a lender. Find out what their requirements are for someone looking to invest in foreclosed property. If you're planning to purchase a property at a foreclosure auction, you'll likely need to put up a sizeable deposit to hold the property until you can arrange financing, so keep that in mind as well.

Buying at a foreclosure auction offers the greatest opportunity for bargains, but you'll typically be competing here with well-funded professional investors here and have little or no opportunity to inspect the property beforehand. For new investors, a better route is often to wait for banks to offer properties that were unsold at auction on the open market. The savings may not be as great, but you'll have a chance to have the property inspected and assessed before purchase, which may improve your chances of getting the loan.

If you currently own a home in which you have a fair amount of equity, you can tap that equity to help finance the purchase of an investment property. However, this step should be taken with caution, as it may put your home at risk if you can't keep up on the payments on the investment property.

Consider an assumable mortgage

A more attractive possibility may be to bypass the foreclosure process and try to reach an agreement with a homeowner before the property is foreclosed. If the loan is assumable, all you need to do is take over the payments from a homeowner facing foreclosure. You can typically find listings of properties in default (a step short of foreclosure) in your local paper.

You may also be able to arrange a short sale with a homeowner in default who's looking to get out of the mortgage. The advantage here is that a short sale, though not actually a foreclosure, is typically for less than the market value of the property and may make it easier to qualify for financing. However, short sales can take months to arrange, assuming the homeowner and their bank are willing to go that route in the first place.

One option that many potential investors overlook is that Fannie Mae and Freddie Mac have special financing for their considerable inventories of foreclosed properties that have reverted to them. Though primarily targeted at owner-occupants, special financing under their HomePath and HomeSteps REO programs are available to investors as well, and offer special rates and down payments as low as 3 percent of the purchase price.

Look for partners to invest

Finally, a very smart option for first-time real estate investors is to consider taking on one or more partners in the venture. This not only enables you to pool your resources to come up with a down payment and in qualifying for the loan, it also minimizes your losses in the event the investment turns bad.

If you have friends or family members who are also interested in becoming first-time investors, this route allows all of you to make your first venture into real estate investing while minimizing your exposure to loss, while also enabling you to learn the ins and outs of the business before taking on bigger commitments. This is also a good route for one person who is going to be actively managing the property, with one or more investors with a financial interest only.

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