How Do I Buy a Bank Foreclosure for My Home?

The Mortgage-Pro · Site Admin Joined: 19 Jan 2005 Posts: 2248

Question: We don't have much money, but we do want to own a home. Can you offer advice on a bank-default transaction or other distressed-property sale?

-- Yonghe, Alexandria, Va.

Yonghe: Have you been watching those late-night real-estate gurus who promise riches if you invest in bank-default homes, otherwise known as foreclosures? Don't be taken in. Unless you're an experienced investor (the type who snaps up the best deals before they go on the block), foreclosures rarely are bargains and almost always trouble.

For starters, because foreclosures are distressed properties, often in poor shape, you shouldn't even think about buying one unless you have a handle on fix-up costs and know some reliable contractors. Also, once bidding begins, you're often forced to make decisions too quickly based on too little information. The seller, who may be an heir or a lender, may require all cash and not allow you to inspect the property before buying it. The property may be encumbered by legal judgments, second mortgages and liens, which you may not discover until after the sale. And in states where foreclosure sellers are exempted from disclosure laws, if after your purchase you find out that something about the property was misrepresented, you're stuck.

To keep track of all the available listings in an area, you need to be a regular reader of the legal notices of the local newspaper, and the Web sites of major lenders. If you want a foreclosure house listed by the Department of Housing and Urban Development (www.hud.gov), you'll have to go through a real-estate agent, who'll walk you through the technicalities of the sale. HUD will pay the agent's commission. You'll have to pay a down payment of up to 20%, and an "earnest money fee" of between $500 and $2,000.

But why go through this hassle for a home that's likely to bring you more headaches than joy? If you have a steady job and pay your bills on time, why not buy a home that's been loved and cared for, even if you have to pay market rate? You may be able to afford more than you think. Although they're starting to creep up, interest rates remain at historic lows, and fees for closing costs, typically around 3% of the cost of the loan, have been dropping steadily during the past decade. Most lenders consider you qualified if your monthly anticipated housing expenses will make up no more than 28% of your gross income, and your monthly overall debt obligations (including such things as alimony, car loans, credit cards and the mortgage loan) are no higher than 36% of income.

Plus, there's a whole cornucopia of loans backed by Fannie Mae, Freddie Mac and various government agencies to help struggling buyers. For instance, low and moderate-income households may qualify for a loan insured by the Federal Housing Administration, which requires only a 3% to 5% down payment, and eligible veterans may be able to get a Veterans Administration loan with no down payment. There are even specialty loans to promote home ownership near public transit, in rural areas or among buyers who have family members with disabilities. I suggest visiting one of the bigger real-estate firms and lenders in your area to see what you can really afford. And when the late-night foreclosure hucksters come on, switch the channel to Leno or Letterman.

-- Ms. Fletcher is a staff reporter for The Wall Street Journal. Her "House Talk" column appears most Fridays on RealEstateJournal.com