Should You Buy a House in Foreclosure for Your First Home?

 

Buying a home is a very big decision. There are very few things you will ever buy that cost more money or take longer to pay off, after all! Most houses take three decades to pay off, and the sticker prices are measured in the hundreds of thousands. These high prices are often very limiting to young buyers, as the amount of cash necessary just to make a down payment can feel simply unattainable. Many first-time homebuyers try to consider all of their options, as traditional pathways to buying a house are often out of reach for them.

 

One alternative avenue that many homebuyers follow is to try buying their first home through foreclosure. This process can offer some drastic savings to buyers, but it definitely comes with risks. This post is aimed at helping first-time homebuyers who are thinking of buying a home that is in foreclosure, answering key questions such as “What is foreclosure?”, “Is buying a home in foreclosure safe?”, and more.

 

American couple moving into newly purchased house

 

What Is Foreclosure?

 

Foreclosure is a process that occurs when a homeowner is no longer able to make their mortgage payments. There are several different types of foreclosure, but most of them lead to the sale of the home or property so that the mortgage lender can make back the money that they are owed. In most cases, the lender is unable to make back the full amount that the borrower owes them, but they are at least able to get a large portion of the amount very quickly.

 

Foreclosure is something that both lenders and borrowers want to avoid as much as possible, as it damages a borrower’s credit score and strips them of most of the equity they have in their home, and it reduces the total amount of money that a lender makes off of a mortgage. Basically, for lenders and for borrowers, foreclosure is a bad thing. For prospective buyers, though, it can be very good depending on several different factors.

 

Types of Foreclosure

 

Generally speaking, there are three main types of foreclosure: judicial foreclosure, non-judicial foreclosure, and strict foreclosure. The idea is the same in each case, but the administrator and the timeline of the sale vary. In a given state, any one of these or combination of these may be legal.

 

Judicial Foreclosure

 

The judicial foreclosure is arguably the most common type of foreclosure in the United States, as it is legal in all 50 states and even mandated in some. With a judicial foreclosure, the mortgage lender files a juncture with the state or local court system to initiate the foreclosure. This usually happens after the borrower misses their third straight mortgage payment, which is known as going 90 days past due. When the court approves the juncture, the borrower is sent a letter notifying them of what will be happening if they don’t catch up on their payments. Specifically, the letter indicates that foreclosure will occur if the borrower is not able to repay all that they are behind on over the course of about 30 days. If the buyer is unable to pay up in time, the house or property is sold at an auction conducted by a local court or sheriff.

 

Nonjudicial or Power of Sale Foreclosure

 

While the judicial foreclosure is available all over the country, the nonjudicial foreclosure is only available in a much more limited set of states. It is also known as a statutory foreclosure, and it is only permitted in states where the mortgage paperwork is permitted to contain a power of sale clause.

The power of sale clause is a snippet of the contract that allows lenders to auction off a delinquent property without the need to bring in the courts or judicial system. Naturally, there are usually restrictions that govern the application of this clause, like requiring lenders to endure certain waiting periods and notify borrowers a preset number of times. These rules vary depending on the state and municipality where the foreclosure is taking place. As the third-party is eliminated, nonjudicial foreclosures are often quicker than judicial foreclosures. However, some states allow borrowers to appeal the foreclosure process in a court, which ultimately slows the proceeding down and can make it last even longer than a standard judicial foreclosure.

 

Strict Foreclosure

 

Of the three types of foreclosures listed in this post, the strict foreclosure is by far the rarest. In fact, only a couple of states in the entire country even allow it. Strict foreclosures are not common, and they are usually only permitted in situations where the home in question is worth less than the amount that is currently owed on the mortgage. With strict foreclosures, the lender files a motion to take direct ownership of the house rather than needing to commit to selling it. If the proceeding is approved, the lender has the option to do whatever they want with the house rather than just immediately slating it for auction.

 

white and brown wooden house on a cloudy day in spring

 

What Are the Advantages of Buying a House in Foreclosure?

 

1.     Houses in foreclosure tend to sell for far below market value

 

When a house enters foreclosure, it is because a borrower is very behind on their mortgage payments. Going through the foreclosure process is not very rewarding for mortgage lenders, despite the quick influx of cash, and they often do all that they can to afford having to go into foreclosure. However, once the lender decides that the best or only option is to file for foreclosure on a property, the proceedings tend to go very quickly. When a lender files for foreclosure, they are usually already accepting the fact that they are going to lose money on the property in question.

At the point of a foreclosure auction, the lender is normally just trying to get as much as they can for the property as quickly as possible. As they usually prioritize speed over amount, buyers are usually able to get away with paying significantly below market price for homes and properties. At the end of the day, lenders are just trying to quickly recover some of their loss, and they have very little control over the final selling price when a house or property is sold auction style. The house goes to the highest bidder, whether that bidder offers a fair price or not!

 

2.     Foreclosure auctions usually happen quickly

 

Similar to the previously mentioned point about lower prices, another advantage of the foreclosure process is the expedited timeline that comes with it. By the time a mortgage lender files for foreclosure, they are simply looking to offload the property in question as quickly and effectively as possible. While they would love as much money as possible for the property, they prefer to get it off their hands as soon as they can. This shortens negotiation phases, contemplation time, and other normally drawn-out parts of the buying process.

 

For example, most people who win foreclosure auctions are already preapproved by a lender for the full value of their bid or offer before the auction commences. Some are even prepared to pay in cash! Being preapproved cuts down the paperwork time significantly, which is part of what makes the transaction go through so efficiently. If you are hoping to buy a house quickly and start the move-in phase, certain houses in foreclosure afford you that opportunity.

 

3.     Lack of competition from other prospective buyers

 

Buying a house in foreclosure is not a very popular thing to do – especially for first-time homebuyers. There is a lot of inherent risk involved, and the process as a whole is very intimidating. Buying a house the traditional way is intimidating enough! If you are able to look past the intimidating aspects, the financing aspect can be just as difficult. Foreclosure auctions are often won by cash or mostly cash bids, which can be extremely hard for buyers to attain.

 

The combination of both of these factors makes winning a foreclosure auction very difficult, which whittles down the total number of prospective buyers. This means that if you are someone who is prepared to buy the house out of foreclosure, both mentally and financially, you will likely have a fairly easy time doing it.

 

white and brown concrete house on a cloudy day in spring

 

What Are the Risks of Buying a House in Foreclosure?

 

1.     Most foreclosure auctions do not allow for walk-throughs

 

As lenders are normally trying to get foreclosed houses off of their hands as quickly as possible, they try to skip as many steps in the selling process as they can. One step that almost always gets skipped is the allowance of walkthroughs and inspections. These take time, especially when every interested buyer wants one. Lenders know that they normally can sell foreclosed houses for decent amounts even without allowing inspections, and this has become the normal practice. While there are inherent risks involved with buying a house in foreclosure, most buyers in this market are real estate investors who know what they are doing, anyway. They walk into the auction ready to assume this risk, which is a huge advantage for mortgage lenders.

 

2.     Foreclosure auctions operate on tight timelines

 

This point appeared as both an advantage and a disadvantage because it can be either depending on your situation. While some people are looking to purchase a house as quickly as possible, others prefer to take their time and truly vet the house that they are bidding on (which is normally a pretty good idea). If you are bidding on a house in foreclosure, you likely do not have the precious time to think about your decision, get your paperwork in order, and properly weigh your decision. This is part of why first-time homeowners are usually better off avoiding foreclosure auctions! They already have very little experience in the housing market, and foreclosure auctions are not the best place to learn.

 

3.     Buyers assume all liens on foreclosed homes

 

When you buy a house, you assume full ownership rights of it. In traditional cases, this is a good thing. You own the land, the house, the yard, and in many cases even the ground below and air above the property. If oil is found in your back yard, for example, you usually have rights to it! After all, for a house to be sold in a regular market, there are certain documents that need to be in order and payments that need to be current for the sale to even go through, which gives both buyers and sellers a certain degree of security.

 

In the case of a foreclosure, being fully responsible for the property carries a different kind of weight. When you buy a foreclosed home, you normally buy it as-is. You get everything that is inside, and you immediately gain full rights to the house. Nice! What is not so nice is that you also inherit any debts and liens against the title, and you are responsible for any repairs that are imminently necessary. These costs can add up, and buyers often don’t know about them until the sale has fully gone through.

 

4.     Current owners might occupy the house even after the auction

 

This one is a little rare, but it absolutely happens. In certain types of foreclosures, current owners are allowed to occupy the house for a certain amount of time after the sale. In other cases, they simply don’t want to leave even if they are not allowed to stay. While the chances are slim, buying a foreclosed house might mean you become the landlord of tenants who don’t want to leave, and you may need to file an eviction notice to get them out of the home. After all, nobody wants to have their home taken away from them, and that is exactly what a foreclosure is.

 

white and yellow wooden house near green trees during daytime

 

Should You Buy a Foreclosed House as Your First Home?

 

There is no great one size fits all answer to this question. On one hand, buying a house out of foreclosure can provide some real savings opportunities to prospective first-time homebuyers. This is incredibly valuable, as most first-time homebuyers struggle significantly just to make a hefty down payment. Buying a house out of foreclosure often shaves down total home prices, which leads to a watered down and much more affordable down payment. On the other hand, buying a home out of foreclosure inherently involves a lot of risk, and many first-time homebuyers are not in a strong enough financial position to safely assume this risk.

 

As we mentioned above, most houses bought out of foreclosure must be purchased without an inspection or a walk-through, and almost all foreclosure sales are on an as-is basis. Many foreclosed homes are either in disrepair or vandalized on the inside, too, which leads buyers to shell out additional cash once the sale goes through. This risk is often too much for first-time homebuyers, and it is why real estate investors usually edge out first-time homebuyers when foreclosure auctions take place.

 

Is Buying a Home in Foreclosure Safe?

 

If you have read this far, you already know the answer to this question. No, buying a home in foreclosure is not safe at all. There are many inherent risks, and there is very little way to mitigate them without hiring an expert to attend the auction and pre-auction proceedings with you. If you are a first-time homebuyer, it is highly advised that you avoid foreclosure auctions, as there is a really good chance that you will get stuck buying a home that you absolutely should not buy. There is a reason that most foreclosure auctions are won by real estate investors, and it is usually best to leave those houses for them, anyway.

 

 

Thank you for reading our post on buying your first home out of foreclosure. Buying foreclosed homes is not for everyone, as the risk involved can often far outweigh the benefits – especially for first-time homebuyers. If you are skilled at home repair and have a flexible move-in date, buying a house out of foreclosure may be a suitable option for you. However, if you have kids, have less flexibility, or are less skilled with home improvement tasks, you may be better off buying a home through more traditional avenues.

 

If you decide to visit Myrtle Beach or any other place in South Carolina and fall in love, reach out to us for help. We at The Boyd Team are always here to help you figure out whether Myrtle Beach is your next home or not, and we are committed to helping you find the right property for your needs and dreams. Any question that you have about moving to the area and finding your dream home by the beach is our pleasure to answer. Feel free to send us an email at eddie@boydteam.com or text or call us at (843) 222-8566, and we will get back to you as soon as we can. Being true natives of the Grand Strand and Horry County and with over 25 years of experience in the local real estate market, whether buying or selling, we can help you make your dreams a reality.  

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