Can I Use a Mortgage to Buy a Foreclosed, REO, or Short Sale Home?
Published: 09/13/2012 by Kevin Mulligan
The housing bust has left millions of square footage of homes either in foreclosure, REO (owned by a bank), or at risk of being foreclosed on and in need of a short sale. With these properties the cost of purchasing the home is often significantly lower than buying a home that hasn't been foreclosed on. The bank often owns the property (called REO) and is not in the business of managing vacated property.
However, a common question when looking at foreclosures or potential short sale homes is whether or not you can use a mortgage to purchase this type of home.
The simple answer is yes, you can. But that doesn't tell the full story.
Buying a Short Sale
If you are looking at a home that could be short sold, you can use a mortgage to buy the property.
However, be forewarned that buying a short sale can be a lengthy process simply because the bank isn't going to want to lose money on the mortgage from the seller. With a short sale the home is sold for less than the mortgage balance owed. This means that the bank must agree to take a loss on the difference before the property can be sold to the new buyer.
The process of getting a short sale approved can take weeks if not months. That isn't to say approvals don't come in, but under normal circumstances you can't just put an offer on a house and move in three weeks later. It will take time for the bank to make a determination on how much they can lose on the home before you can proceed.
Buying a Foreclosure
When you are looking to purchase a foreclosure it depends on who currently owns the property. If the home is in the midst of being foreclosed on, the paper trail that will follow will take a long time to sort out. If the home is a Real Estate Owned – REO – that means a lender like a bank, credit union, or government agency has foreclosed on the property and now owns it. And unlike a seller with built-in equity, the bank that owns the property likely has a set price in mind on what they will sell the home for. They aren't desperate to move out because they were just transferred; the home is now an asset with a price. This can make negotiations frustrating.
Nonetheless, if you can come to an agreement on an REO home, you can use a mortgage to pay for it.
Buying a Home at Auction
Many homes in the midst of foreclosure will be auctioned off on the courthouse steps on a scheduled date. This is a great place to get a great deal on a property.
Unfortunately, you almost always must pay cash on the spot to buy the property. That makes using a mortgage impossible unless you plan to refinance after purchasing with cash. There are other problems with auctioned homes, too: you often can't spend time walking in the house or doing an inspection. You're buying mostly sight unseen which means there is significant risk involved.