Last week, I explained the difference between a foreclosure and a short sale. And obviously, these houses can be a great option for the right buyer, especially first time home buyers. This week, I would like to explain the process of buying these types of houses, as it can become a little tricky depending on a number of factors.

When considering a foreclosure, it is important to find out what stipulations the bank has on the property. Are you purchasing an “as-is” property, which means the bank will not do any work to fix issues with the property? Is the bank allowing an inspection? Are there known issues which will be fixed? These kinds of questions are important to ask, because they can dramatically change the value of the house.

You must also ask yourself how long the house has been vacant. The longer a house has been vacant, the more likely there will be a serious issue with the house or that a squatter lived in it and damaged the house.

Once you have determined that the house is the right house for you, and you are getting a good deal, it is important to consider how you will finance the house. If you are paying cash, then you simply negotiate the final sale value, go into contract, and write a check at closing. It works in exactly the same way as buying a non-foreclosure house.

But if you are going to be financing your foreclosure, you need to consider a few things before buying the house. If the house is in good condition, has been maintained by the bank, and if you are allowed an inspection, the mortgage process will likely work in much the same way as the process for non-foreclosure properties.

If, however, the property is not in good condition or is being purchased “as-is,” it can be tricky to finance the property. You need to first determine if the house’s current value warrants the purchase price. If the house is worth $80,000 in its current condition, then that is all you can mortgage. Even if $5,000 in repairs will double its value.

Next, if you are going with an FHA loan, you need to find out if the house will pass an FHA appraisal. FHA appraisers will note in their appraisal if there are any egregious issues with the property. And if there are, the underwriter will likely require the issues to be fixed before the mortgage can be approved. If this is the case and the property is sold as-is, it can be difficult to secure the FHA mortgage.

Finally, if you are going with an FHA 203k loan, you want to be sure that all problems with the house will be fixed. So if you have some cosmetic changes you would like to make on the property, make sure those are secondary to fixing legitimate house issues. If you don’t, then the loan may be held up.

If you have any questions about buying a foreclosure, please contact me. And if you have anything to add about buying a foreclosure, please leave a comment.