Nearly all the home buyers I work with ask me about foreclosures. With over a million homes foreclosed in 2010, and the news reports of decreasing values and the deals to be made on foreclosed properties, why wouldn’t any owner-occupant home buyer want to get the best possible value? I can’t blame them for asking. There’s just 2 little words that keep most home buyers from being able to purchase those discounted foreclosures – AS IS.
You see, most people buying homes need a mortgage, and the banks don’t particularly like to lend money on AS IS properties. The same banks that don’t like to lend on AS IS properties are the banks doing the foreclosures and marketing them as REO – Real Estate Owned properties through real estate agencies. Some AS IS properties are pretty nice, but many require repairs, some extensive, and when those deficiencies are reported by appraisers, the mortgage underwriters require that repairs be made before the mortgage can be approved. But the properties are being sold AS-IS, so the banks who own them don’t have any obligation to make repairs.
The AS IS offering, coupled with underwriting regulations, often nix mortgages for most owner-occupant buyers working on tight budgets, with the scales tipped toward cash buyers, who can usually swing a quick, clean deal.
2 alternatives for AS IS Buyers
Government backed mortgages offer some alternatives for foreclosure buyers who intend to live in the homes. FNMA, The Federal National Mortgage Association, a GSE commonly referred to as Fannie Mae offers HomePath mortgages on selected FNMA foreclosures. HomePath mortgages don’t require that pesky appraisal, so no one points out the few defects that might hang up a mortgage.
FHA, the Federal Housing Administration offers the 203K Rehab Mortgage, which finances required repairs and other improvements and rolls them into the loan. This type of loan is popular with rehabbers who can qualify and is a good alternative for the AS IS buyer.
Work with a Professional
It is important for home buyers to seek out qualified professionals to assist in the process from the very beginning. If you are interested in purchasing a foreclosure or short-sale, seek advice early on from a real estate professional who has a good reputation for handling and closing that type of transaction. It takes special expertise to deal with foreclosed and short-sale properties, and that also goes for the second member of your team, a knowledgeable Loan Officer.
I always prefer to refer my clients to someone local for the face-to-face contact and hands on management that is necessary with specialty mortgages. When choosing a mortgage person, ask them to explain how financing for foreclosed homes works, and the programs available to allow you to purchase AS IS. If they don’t appear to “know their stuff”, find someone else.