Can You Get a Loan for an Auction House? Everything You Need to Know

Buying a home at auction can be an exciting way to score your dream house at a discount. But coming up with the cash on auction day can be a challenge So can you get a loan to buy an auction property?

The short answer is yes, you can finance the purchase of a home at auction. However, it is more complex than getting a typical mortgage Auction financing comes with specific requirements and risks Read on to learn everything you need to know about getting a loan for an auction house.

Why Auctions Require Cash

Most real estate auctions require the winning bidder to pay the full purchase price in cash at the close of bidding. There are a few reasons for this cash-only rule:

• Speed – The seller wants to offload the property quickly and avoid delays. Waiting for a buyer to secure financing could take weeks.

• Certainty – With cash-in-hand, there is no question about the buyer’s ability to pay. The sale can close right away.

• Simplicity – Cash payments simplify the transaction for the auction company. There’s no need to deal with lenders and paperwork.

As a bidder, you’ll need to prove you can pay cash to register for most real estate auctions. That way the seller knows you’re serious.

Is Auction Financing Possible?

While auctions emphasize cash, some options do exist for financing an auction purchase:

• Bring your own financing – You can work with a lender before auction day to line up financing you can tap quickly when you win the bid.

• Auction financing – Some auction companies offer bridge loan programs to help buyers cover the cash requirement.

• Delayed financing – An alternative is to pay cash from your own funds at auction, then take out a mortgage afterward.

The availability of these choices varies by the auction company and property type. Investors commonly use auction financing, but it also helps regular homebuyers purchase auction homes.

Bridge Loans for Auction Properties

One route to finance an auction home is a bridge loan. This is a short-term loan used as temporary financing until you can get permanent financing.

With a bridge loan, you’ll borrow enough cash to pay for the home at auction. Then you’ll have around 3-6 months after the purchase to apply for standard mortgage financing or another longer-term solution.

Some auction companies offer bridge loan programs themselves to make the process smooth for bidders. Major auction houses like Williams & Williams and Auction.com have bridge financing available.

You can also get a bridge loan through a hard money lender instead. The benefit is these specialized lenders are used to quick closings and high-risk scenarios like auctions.

The catch is that bridge loans charge high interest rates and fees. It’s critical to repay the debt quickly before costs balloon. Refinancing into a conventional mortgage as soon as possible is ideal.

Delayed Financing to Recover Cash

If you can pay cash upfront to buy an auction property, another option is delayed financing. Here are the steps:

1. Pay the full auction price in cash at closing.

2. Take ownership and title to the home.

3. Get the home appraised to determine its market value.

4. Apply for a mortgage with a lender, using the appraised value to determine the loan amount.

5. When approved, the lender pays off your initial cash investment. This lets you recover your capital to reinvest.

Delayed financing turns your all-cash purchase into a mortgage. It requires having the flexible capital to buy in cash first. You also want to be confident the home will appraise well.

An advantage is that you own the home during the financing process. There’s more time for inspections and to address any issues found.

Requirements for Auction Loans

Auction financing programs have much more rigid criteria than standard mortgages. Expect requirements like:

• Large down payment – Borrowers may need 20-25% or more as a down payment. Some programs go up to 40%.

• Pristine credit – Bridge loans often require a 680+ credit score or higher. Delayed financing also demands excellent credit.

• Fast underwriting – Lenders need to underwrite and approve loans within days before auction day. The process is accelerated.

• Investment properties – If financing a fixer-upper or rental, expect higher rates and 25-30% down minimum.

In addition, properties bought at auction are generally not eligible for FHA or VA loans due to the condition. Conventional financing standards are strict.

The Risks of Auction Financing

While getting financing for an auction buy is possible, there are serious risks to weigh:

Limited inspection access – Most bridge loans require only a cursory exterior inspection, if that. Hidden issues can be uncovered later.

ARV unknown – With an auction property, the after-repair value is hard to estimate until you own it and can inspect fully.

Lower appraisal – Properties may appraise for less than expected after closing, putting financing in jeopardy.

Delays and fees – The short loan term gives you limited time to execute permanent financing. Any delays can lead to expensive extensions.

Foreclosure – If you miss payments or can’t get longer-term financing lined up in time, the bridge lender may foreclose.

Cash crunch – Coming up with 20%+ in cash for the down payment can strain resources and tie up capital.

While possible, auction financing adds complexity and uncertainty. Make sure you understand the risks before pursuing this route.

Tips for Getting Auction Financing

If you want to bid on an auction home but need financing, keep these tips in mind:

• Research loan options at least 30-60 days before bidding to allow time to apply and get approved.

• Talk to both bridge lenders and standard mortgage lenders to understand your choices.

• Only bid on homes well below expected value to allow room for surprises and appraisal concerns.

• Inspect what you can externally and do in-depth research on the property before auction day.

• Have a solid plan in place to refinance the bridge loan within the term to avoid higher costs.

• Work with an experienced real estate agent or auction advisor to guide you through the process.

• Only use auction financing if you’re comfortable with uncertainty and have backup plans in place.

Other Auction Tips for Buyers

Aside from financing, first-time auction buyers should remember:

• Attend a few auctions first to understand the process before bidding yourself.

• Research all liens, taxes owed, title issues and disclosures on the property upfront.

• Know the applicable state laws on redeeming auction properties. Some sellers can reclaim the home after auction.

• Inspect what you can externally without trespassing. Look for obvious defects, damage or signs of occupants.

• Set a maximum bid based on the home’s value minus estimated rehab costs and don’t overpay. Stick to your budget.

• Understand and follow the specific auction terms, buying process and rules for earnest money collection.

Talk to a Mortgage Expert

The bottom line is auction financing adds complexity and risk to any home purchase. While available, these loans have demanding requirements.

Before bidding at auction, have an in-depth talk with mortgage and real estate professionals. They can review your financing options, expected costs and timeline. An expert can help you avoid missteps when buying an auction property with a loan.