How to buy a foreclosed home: An 8-step guide

Windows and front porch of a large white home in the background, with a red and white for sale (forclosure) sign in the foregroundImage: Windows and front porch of a large white home in the background, with a red and white for sale (forclosure) sign in the foreground

In a Nutshell

You may be able to buy a home at a discount at several different stages of the foreclosure process. But buying a foreclosed home isn’t without its risks: You may have more trouble finding a private lender willing to issue you a mortgage, and you may need to make significant repairs to the property before you can live in it.
Editorial Note: Intuit Credit Karma receives compensation from third-party advertisers, but that doesn’t affect our editors’ opinions. Our third-party advertisers don’t review, approve or endorse our editorial content. Information about financial products not offered on Credit Karma is collected independently. Our content is accurate to the best of our knowledge when posted.

Interested in buying a foreclosed home? Learning about the process, as well as the risks and advantages, will help you understand what you’re getting into.

Our guide covers how to buy a foreclosed home and what to look out for when making this type of home purchase. We’ll also cover the different types of foreclosure sales.

What does foreclosure mean?

When homeowners don’t pay their mortgages, they risk foreclosure. This is when a lender seizes the property and sells it to recoup the investment they made in the mortgage. The foreclosure process typically begins after a borrower misses several months of mortgage payments.

When the economy is down, there may be more foreclosed homes available to buy — and homes in foreclosure tend to be cheaper than other properties on the market.

Types of foreclosure sales

When you think of buying a foreclosed home, you may think of auctions held on the courthouse steps. But this is only one type of foreclosure sale. You may be able to buy a home at different stages in the foreclosure process.

Early on, you may be able to buy a distressed home while the homeowner still owns it. Later, you may work with banks or the government to buy a home that’s been seized.

Here are five types of common foreclosure sales.

  • Preforeclosures This refers to homes that are in the early stages of the foreclosure. Many states require loan servicers to notify the homeowner that they’re at risk of losing their home and offer a process to help them get caught up on their payments. Some homeowners may be eager to sell their homes at this stage to avoid a long, painful foreclosure process.
  • Short sales — If a homeowner currently owes more on their mortgage than the property is worth, they are considered to be “underwater” on their loan. In this case, a lender may agree to what’s known as a short sale. This is when the lender accepts a home sale for less than the mortgage balance to avoid foreclosure.
  • Sheriff’s sales Once a foreclosure is completed, the home is often sold in a public auction conducted by the local sheriff’s office. In some states, lenders must hire a law firm or trustee company to host the sale. In either case, these foreclosed homes are sold to the highest bidder.
  • Bank-owned properties In some cases, foreclosed homes don’t receive a high enough bid and the bank that issued the mortgage chooses to buy the property. The bank will then try to get the best possible price on the open market within a reasonable period of time.
  • Government-owned properties Much like banks, government entities can also take possession of real estate after foreclosures. The federal government and state and local governments often have homes for sale.

How to buy a foreclosed home

The process of buying a foreclosed home will vary based on the state you live in and the property’s stage of foreclosure. But there are some common steps you can take that can help prepare you for buying a home in foreclosure.

1. Research which foreclosure type might work for you

For example, in some states, foreclosed homes sold at auction must be paid for immediately in cash. Other states only require a cash deposit of a small percentage of the sales price. If you don’t have much cash on hand, you may need to focus on preforeclosures or homes that have already been repossessed.

2. Determine how much you can afford

No matter how you buy your home, you’ll want to comfortably afford the payments. Check your monthly budget and see how much you can reasonably pay each month for your home. A general rule is that you don’t want your mortgage payment to be more than 28% of your gross monthly income. Factor in all the costs of your mortgage — including insurance and taxes along with principal and interest.

Let’s say you earn $72,000 per year, or $6,000 per month. That means you’d ideally keep your monthly mortgage below $1,680. A mortgage calculator can help you translate that into a maximum purchase price for a home.

3. Hire a real estate agent familiar with foreclosures

Buying a foreclosure can be complicated and involve negotiations with lenders and sellers. A good real estate agent can help.

Look for agents with experience buying foreclosed homes in your area to help you navigate the process.

4. Find foreclosures for sale

There are plenty of resources online to help you find homes in some stage of foreclosure. With sites like Zillow and Redfin you can filter for listings that are in preforeclosure or that have already foreclosed.

You can also find government-owned foreclosures online on agency websites, including the U.S. Department of Housing and Urban Development, the U.S. Department of Agriculture and Fannie Mae or Freddie Mac.

5. Get preapproved for a mortgage

To get preapproved for a mortgage, you’ll give your lender some information about your finances. In return, they’ll give you a conditional offer to loan you money up to a certain amount. This can give you some reassurance that you’ll likely get approved for a mortgage once you’ve settled on a house, though it’s not a guarantee. You can also be preapproved with multiple lenders to compare the offers you receive.

6. Make an offer

When you and your real estate agent have settled on a home and a fair price for it, it’s time to make an offer. Depending on the stage of foreclosure, you may need to make a bid at a public auction, or you may be dealing with a bank or the homeowner directly. Your agent can help make sure your offer goes to the right place.

7. Get an inspection and appraisal

Once your offer has been accepted, it’s a good idea to have the home professionally inspected before committing to the purchase. In a home inspection, a third-party inspection company will walk through the home and identify potential problems with its physical condition. You may be able to cancel the purchase if the inspection turns up issues that will need significant repairs.

However, homes bought out of foreclosure are often sold strictly “as-is,” and you may not even have the chance to inspect it. This can be risky. It’s a good idea to have some money set aside to fix up the home if you go this route.

If you’re buying the home using a mortgage, your lender will likely require the property to be appraised to make sure it’s worth enough to justify the loan.

8. Buy your home

Again, this might look different depending on the type of foreclosure you’re buying. You may sit down at a closing table to sign documents as you would in a traditional home sale, or you may be paying a cash deposit after an auction. Your real estate agent and lender can help guide you through the process.

Benefits of buying a foreclosed home

The benefits of buying a foreclosed home can include …

  • Lower prices Homes in foreclosure are often cheaper than similar homes on the open market. That’s often because of the perceived risk of buying a foreclosed home, and the sometimes-complicated nature of doing so.
  • Motivated sellers When a home is in foreclosure, homeowners may be eager to sell the home quickly to avoid legal and financial trouble. After a home has been foreclosed, the bank or government agency that now owns it likely doesn’t want to keep it for long. In both cases, sellers may be willing to work with you and give you benefits you might not find on the open market.
  • Easy to build equity  Foreclosed homes may be cheaper than normal or need repairs. If you can buy the home at a good price and fix it up, you may be able to quickly boost the value and gain a significant amount of equity.

Are there disadvantages to buying a foreclosed home?

There are also risks for buying a foreclosed property. These can include …

  • Buying as-is In most cases, you won’t be able to ask sellers to make repairs before the home is sold. You’ll need to take on those projects yourself once you’ve closed on the sale. If you can’t inspect the home before buying, you may run into hidden costs you weren’t expecting.
  • Complicated negotiations Buying a foreclosed home can involve a lot of different parties, including banks and government agencies as well as the homeowner. If you’re used to traditional homebuying, it can be frustrating to potentially have to wait on different levels of approval.
  • A lot of competition The best foreclosed home deals are likely to generate a lot of interest. This can push the price up beyond what you’re willing to pay. Also, companies often buy foreclosed homes as investments, making the competition even stiffer.

Financial help for buying a foreclosed home

Depending on the condition of the property, it may be difficult to get a mortgage from a private lender to buy a foreclosed home. If the traditional lenders you contact are hesitant to approve you for a loan, you may consider government-sponsored loan programs. These include …

  • 203(k) loans These loans from the Federal Housing Administration are designed to help homebuyers finance both the purchase of a house and the repairs needed to get it back into shape. The 203(k) program is actually a type of mortgage insurance, not a loan, so you’ll need to apply through an FHA-approved lender.
  • Fannie Mae HomePath Ready Buyer™ Fannie Mae offers special financing to first-time homebuyers who want to purchase a foreclosed home that Fannie Mae owns. This includes up to 3% in closing cost assistance through the Ready Buyer program.
  • Freddie Mac HomeSteps® — Freddie Mac offers some homebuyers a “first look” at the foreclosed homes it owns, before investors get the chance to bid. Freddie Mac also has several renovation mortgages that can help you get the home ready to live in.

Next steps: Is buying a foreclosed home right for you?

Buying a foreclosed home can entail risks and complications that you usually won’t face when you buy a home the traditional way. But buying a foreclosed home can also mean a lower price point and a quicker route to equity.

Before you start, think about your financial goals and timeframe for buying a house. A real estate agent or loan officer with experience in dealing with foreclosed homes may be able to help you weigh your decision.

FAQs about buying a foreclosed home

Why are foreclosed homes cheaper?

Foreclosed homes can be cheaper than other homes because there’s a level of risk associated with buying a home in foreclosure. The status of a foreclosed home, including general upkeep and repairs, isn’t always made known to buyers. So while the house may be cheaper than other listings, it may require additional investment to be livable.

Who should not buy a foreclosed home?

Buying a foreclosed home isn’t a good idea if you aren’t certain that you understand the risks associated with this purchase. You’ll want to have additional money set aside in case the home needs repairs, and you’ll also need to be open to negotiation. That said, if you’re confident about what you’re getting into, buying a foreclosed home could be the option that’s right for you and your family.

About the author: Andrew Dunn is a veteran journalist with more than a decade of experience as a reporter and editor at North Carolina news organizations, including the Charlotte Observer and the StarNews in Wilmington. In those roles,… Read more.