Being aware of financing is key for any home purchase, but especially in an auction. Here are some of the ways to finance your real estate auction purchase.
While auctions can provide a way to purchase foreclosures at lower prices, the foreclosure process typically involves selling properties as-is without any home inspections or appraisals. However, many lenders require buyers to have an inspection and appraisal to take out a mortgage.
Buying a home at an auction involves less competition with other buyers than traditional home purchases, but financing real estate from an auction differs from buying a house the traditional way. Those planning to buy a home at an auction must explore other ways to finance this real estate purchase.
Purchasing a home at a foreclosure auction can be an exciting way to get a great deal on real estate. However, coming up with the cash to place a competitive bid can be a challenge. That’s why it’s crucial to have your financing in order before bidding at a foreclosure auction. In this comprehensive guide, I’ll walk you through how to get a loan to buy a home at a foreclosure auction so you can bid with confidence.
Get Pre-Approved for a Mortgage
The first step is getting pre-approved for a mortgage This shows sellers you’re a serious buyer and helps ensure you’ll be able to obtain financing if you win the bid, Here are some tips
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Shop around with several lenders to compare interest rates and fees Online lenders often offer the lowest rates
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Get pre-approved for more than you think you’ll need. This gives you flexibility in case bidding goes higher than expected.
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FHA and VA loans allow down payments as low as 35% and $0 respectively Conventional loans typically require at least 5-20% down,
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High credit scores in the 680+ range help ensure approval and the best terms. Scores below 620 may require an FHA or VA loan.
Having a pre-approval letter in hand shows you’re ready to move quickly if you win the auction.
Learn About Financing Options
While it’s possible to get a conventional loan for a foreclosure property, FHA and VA loans are better options in many cases.
FHA Loans
FHA loans only require a 580 credit score and 3.5% down payment. They’re more flexible if the home needs repairs. FHA 203(k) loans roll renovation costs into the mortgage.
VA Loans
For military buyers, VA loans offer $0 down and no monthly mortgage insurance. Like FHA, they can be used to purchase and renovate. Credit score and income requirements are also low.
USDA & Other Loans
USDA loans (for rural properties) and state/local programs also feature low down payments and flexible credit guidelines. Do your research to see what’s available.
Getting pre-approved for multiple loan types ensures you have options covered.
Research Auction Procedures
Foreclosure auction procedures vary by state and county. Key things to know:
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Registration requirements – Do you need cashier’s check, ID, etc?
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Bidding process – Open outcry, sealed bids, online?
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Payment terms – When is earnest money due? How quickly must balance be paid?
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Title conveyance – Find out when you can take possession and receive title.
Confirm all requirements to avoid issues. Being prepared and knowledgeable gives you an edge.
Have Funds Available
You’ll need funds for the down payment, closing costs, and potentially repairs. Here are tips for having money ready:
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Down payment – Have minimum 3.5-20% down payment available depending on loan type. Winning bidders often pay 10-30% down.
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Closing costs – Budget 3-5% of purchase price for closing fees like appraisal, title insurance, etc.
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Repairs – Inspect property thoroughly and estimate repair costs. Unoccupied homes often need work.
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Proof of funds – Get statement showing required funds in your account. Cashier’s check even better.
Banks verify funds to ensure you can close quickly if you win. Thorough preparation is key.
Inspect Before Bidding
Never bid on a foreclosure auction property you haven’t viewed in person. Schedule an inspection to:
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Verify condition – Look for any structural/mechanical issues.
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Assess repairs needed – Get contractor estimates if major work required.
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Research value – Compare to recent sales of similar homes.
Proper due diligence prevents making a risky purchase. Be objective about issues and don’t get swept up in bidding fever.
Determine Maximum Bid
Your maximum bid should be based on:
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After-repair value – What will home be worth after fixing major issues?
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Needed profit margin – For flip, determine minimum profit needed to make deal worthwhile.
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Financing costs – Account for down payment, closing fees, interest payments.
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Repair estimates – Budget for repairs identified during inspection.
Leave room for unexpected costs and issues. Avoid “winning” a bid only to lose money in the end.
Line Up Contractors
If substantial repairs are needed, have contractors ready to provide repair quotes and do the work. Key tips:
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Get multiple bids for major projects to compare pricing.
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Verify license status and check references thoroughly.
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Make sure contractor has availability when repairs will be needed.
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Sign an agreement so contractor is locked in before bidding.
Lining up contractors ahead of time ensures the work can be completed quickly after closing.
Bid Confidently
By following these steps, you’ll be fully prepared to bid at a foreclosure auction with confidence:
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Pre-approved financing in place
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Repair estimates and maximum bid set
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Proof of funds and cashier’s check ready
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Contractors lined up if needed
Do your homework and stick to your maximum bid price. Be persistent and eventually you’re likely to get a great deal on an auction property. With the right financing and preparation, you can successfully purchase a home at a foreclosure auction.
Buying a House at Auction
Buyers interested in purchasing a home at an auction should carefully review financing options while creating their budget. Some options come with added costs, such as interest, which can lead to a higher price overall. For other financing options, buyers must meet specific requirements to be eligible.
Knowing more about different types of financing for purchasing a foreclosure can help buyers determine the best choice for their situation. The following are some ways buyers can finance a house at an auction.
Cash-out refinancing allows buyers to purchase a home and take out equity from the property immediately. In this case, buyers pay for the home at an auction, then refinance afterward. They can then use this equity to repay the borrowed money to purchase the home.
A cash-out refinance involves getting an inspection and appraisal done on the property. Therefore, this financing option might not be suitable for houses in poor condition.
Home equity loans offer a way for current homeowners to finance a home purchase at an auction based on equity. Buyers with enough home equity can apply for a home equity loan and use this money to buy a foreclosed home. These loans usually provide higher amounts than hard money, personal, and other types of loans. They also tend to have lower interest rates and longer repayment terms.
Buyers should remember their current home is used as collateral for a home equity loan. Failing to make payments on this loan can lead to foreclosure.
Banks, credit unions, and other financial institutions sometimes offer personal loans for those who meet eligibility requirements. This is usually based on a borrowers credit score, credit history, income, or other means of repaying the loan.
Personal loans typically do not require any collateral from borrowers. The terms and conditions of these loans vary from lender to lender and usually have longer terms for repayment than other financing options. However, some have high-interest rates. Those planning to purchase a home at an auction can usually receive funds quickly with a personal loan.
Hard money loans offer a fast way to finance a real estate purchase at an auction. The approval process is generally quicker than the approval process for home equity loans and other financing options. However, hard money loans also tend to have higher fees and rates, which can significantly increase the overall cost of an auction purchase.
Hard money loans have a low loan-to-value ratio, which might require buyers to come up with a higher amount for a down payment. The amount of these loans depends on the value of the foreclosure.
Peer-to-peer (P2P) lending provides another quick way to finance a home at an auction. This type of lending involves using platforms that help buyers find individuals or groups to loan them money. P2P lending can have higher down payments and rates, just as hard money loans do. However, exact terms vary from lender to lender.
This type of lending might not be available for foreclosures with higher price points, and some P2P lenders have limits on the amounts they can finance. Buyers approved for a P2P loan can usually receive the money in a short amount of time.
Purchasing a home at an auction with a traditional mortgage can be done sometimes, although its unusual. Conventional mortgages typically take at least 30 days to process. Depending on the auction date, those buying a foreclosed home might need to secure this money sooner.
Using a traditional mortgage for an auction purchase involves finding a lender who can process it in a shorter timeframe. Another option for those who want to use a conventional mortgage is purchasing a foreclosure from a bank that provides a longer timeframe for payment, such as several weeks instead of a few days.
Purchasing a home with cash allows buyers to pay for it upfront. Buyers must show they have the funds to buy a home at an auction. In some cases, buyers must show that they have secured funding to make a bid on a property. Paying with cash means that this funding is already secured.
Using cash for these purchases helps buyers avoid paying more in the long run due to interest rates and other fees. Buyers can typically pay for a home with cash, a cashiers check, or money order.
Nashville Real Estate Auction Resources
The Ashton Real Estate Group of RE/MAX Advantage
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How to Find and Buy a Foreclosed Home
Should you buy a home before a foreclosure auction?
As with foreclosed properties, expect to buy as-is. Make sure you get your own independent home inspection before closing on the home. Once a lender begins the foreclosure process, the homeowner may still have time to sell the home before it hits a foreclosure auction.
How can I buy a foreclosure home?
To buy a foreclosure home, you can follow two main methods: purchasing at auction or buying from a lender after they failed to sell at auction. Additionally, you can explore options to purchase homes on the cusp of foreclosure.
How do I get a home loan for a foreclosure?
1. Get preapproved for a home loan 2. Team up with a buyer’s agent who understands how to buy a foreclosure 3. Search for foreclosed homes near you 4. Make a competitive offer 5. Prepare for potential difficulties 1. Get preapproved for a home loan 2. Team up with a buyer’s agent who understands how to buy a foreclosure 3.
How do I finance a foreclosure purchase?
If you plan to finance a foreclosure purchase, you will want to obtain a preapproval from a mortgage lender. You might also consider specific loan programs designed for foreclosure purchases such as the FHA 203 (k) loan, which allows borrowers to take extra funds to finance repairs and renovations.