Finance Options for Buyers of Foreclosed Homes

Foreclosed homes can provide buyers with a way to purchase a property at a knock down price and this is a good way for those that cannot afford to enter the property market in the more conventional way. However the majority of foreclosed homes need major repairs, cosmetic and or structural which mean that private lenders tend to be less likely to offer finance on foreclosure deals.

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If you are able to pay for the property and any renovations then you are in a very good position. This is the reason why a number of people to enter into a partnership with outside investors every year. This way they are able to obtain immediate help to purchase a foreclosed home and once the property is refurbished and ready for resale do they have to split the profits with the initial investor/s. Cash deals represent a large share of real estate owned sales.

For those that need to gain finance it is worth them looking into one of the specialist  programs that have been designed specifically for this market and are aimed at distressed and uninhabitable properties. The process as it is known currently is something that is soon to shrink; as of October 2014 Fannie Mae will no longer be offering its HomePath Mortgage. This was a process that allowed individuals to purchase from its own portfolio of foreclosed homes with them only needing to put down a deposit of 5% and not having to take out mortgage insurance. Replacing this is the mortgage guarantor with a number of “flexibilities.”

There are two financing options which will still be available to those who qualify, these are 203(k) loans through the Federal Housing Administration (FHA), and the HomeSteps program which is offered through another government sponsored purchaser of mortgages Freddie Mac.

203(k) Loans

The FHA designed its 203(k) mortgages to help alleviate the worries that the financial institutions and banks have and makes the high risk real estate owned purchases far more appealing and secure. This scheme charges the borrowers a mortgage insurance premium, and the loans are then guaranteed by private lenders that participate in the program.

There is one big advantage for borrowers, this being the ability to finance the foreclosed home purchase and any repairs in one single mortgage. There is also a more basic streamlined version of the 203 (k) available and this is meant for the foreclosed home purchase that requires limited repairs, and under this scheme individuals can borrow up to $35,000 above the sale price to cover the basic repairs immediately.

However if the foreclosed home requires structural repairs the traditional 203(k) loan is usually the best option. Unlike the streamlined variations the 203 (k) loans it requires homeowners to undertake at least $5,000 and then to additionally pay for a qualified independent expert to make an overall inspection of the property and provide a full report.

The main drawback to these loans is the price, as individuals will have to pay for mortgage insurance as well as an inflated interest rate that works out to be 0.25% higher than other more conventional loans.

Going with Freddie

The HomeSteps program that is offered by Freddie Mac is another compelling option for consumers in the real estate owned market and it offers many of the same benefits as the expiring HomePath program. However in comparison with the 203(k) program, HomeSteps is only applicable to a small amount of foreclosed home purchases.

Freddie Mac is a government sponsored enterprise, and it operates by buying loans from the banks which it will then pool and sell onto investors in the form of securities; in the same way in which the Fanny Mae program would have operated. HomeSteps, through its private lending partners offers special financing for those wanting to buy a foreclosed home but this is restricted only to properties that Freddie Mac already own. Another drawback of the HomeSteps program is that it is currently only available in Alabama, Florida, Georgia, Illinois, Kentucky, North Carolina, South Carolina, Tennessee, Texas and Virginia.

For those wishing to purchase a foreclosed home, providing that they reside in one of these states HomeSteps has some significant benefits to offer. Probably the biggest advantage is that purchasers do not have to commit to buy mortgage insurance, making this the major difference from the 203(k) loans. This difference alone can save buyers thousands of dollars over the course of the mortgage. The other advantage is that the HomeSteps mortgage doesn’t require an appraisal, which can prove to be a major hurdle when seeking a conventional loan.

Conclusion

Although the retirement of the HomePath program by Fannie Mae’s is regrettable within the foreclosed home market, those interested in buying a foreclosed home, should take a look at the special programs by FHA and Freddie Mac as there are a multitude of benefits that could be applicable.