It is possible to buy a distressed or foreclosed home without cash by either financing the purchase or assuming the original owner’s mortgage. Some sellers are willing to transfer ownership of a property and let the buyer assume the mortgage to avoid having a foreclosure on their credit history. This option can be a useful incentive in the case of underwater homes that require significant repairs. But not all mortgages are assumable, and even when a mortgage is assumable, it requires permission from both the lender and the original homeowner. The more common way to buy foreclosed homes without cash is to use loans that don’t require a down payment, such as home equity financing and hard loans.
Buying foreclosed homes without a down payment is not as impossible as you may think. There are two main ways to buy a foreclosed home without a cash down payment: with a loan assumption or with financing that doesn’t require a down payment, such as cash-out mortgage refinancing, home equity lines of credit, shared equity mortgages, or hard loans. Of course, these options only work if you already own property.
In this article, we will focus on how to buy foreclosed homes with a loan assumption.
What is a loan assumption?
A Loan Assumption happens when a buyer takes over the mortgage of the seller. Some sellers are willing to transfer ownership of distressed property and let the buyer take on the mortgage if they are underwater and want to avoid having a foreclosure on their credit history. As you would expect, this transaction requires the approval of the lender. Even with the approval of the lender, it doesn’t work with all mortgages. It requires an “assumable mortgage.”
Are all mortgages assumable?
No, not at all. Conventional mortgages, which are mortgages that can be sold in the secondary mortgage marketplace, are generally not assumable when they have fixed terms. Conventional loans with adjustable-rate mortgages are sometimes assumable if the fixed period is over. However, government-backed mortgages, such as FHA, VA, and USDA mortgages are typically assumable.
Note that it is often easier to assume a loan when you inherit a property with a mortgage or when you take on the full mortgage after a divorce.
How to buy distressed homes in 6 steps
These steps should serve you well for any home that has not yet gone through a foreclosure sale. In some states, they may only work until prior to the scheduling of that sale. Carefully research the applicable laws in your state.
- Step 1: Find the owners of distressed properties in your area and their lenders’ information.
- Step 2: Determine if it’s an assumable loan and contact each lender and ask to assume its loan without qualification.
- Step 3: Contact the homeowners and ask for permission.
- Step 4: Finance the purchase with a loan if assuming the mortgage is not an option.
- Step 4: Submit all the proper documentation to a title agency.
- Step 5: Begin the closing process, get closing documents notarized, and enjoy your new home.
How to buy foreclosed homes with no money
Getting a foreclosed property doesn’t have to be a herculean task, nor does it always require you to spend a fortune. Sometimes, it can be the most affordable way to get qualified to buy. Here’s what you have to do, step by step.
1. Start by looking for distressed homes in your area
Distressed homes are headed for foreclosure sale. The owners have defaulted and are about to have their homes sold out from under them to cover their debt. Distressed homes are not something you have to dig around to find. It’s public knowledge. To find them, do the following:
Finding distressed homes
- Step 1: Drive to your local county clerk. This is a standard public record. You can typically ask for properties that are distressed or pre-foreclosure at your local county office.
- Step 2: Access public records of distressed homes. You can find out foreclosure properties by town. These update regularly, so if you don’t like any you see, come back later.
- Step 3: Find the homes you like. Make sure that you get a ballpark idea of their market value. If you are not sure that you can afford it, note it anyway.
- Step 4: Take note of both the lender and owner. You might want to check out the foreclosed property’s contact information, too.
2. Reach out to the mortgage lender who is foreclosing
Call lenders in reference to the properties that they are foreclosing on. Explain that you want to do a loan assumption without qualification. They will ask a couple of questions if they’re open to it. If they are, then you can usually move to the next step.
If they are not willing to give you the assumption, you probably are going to have to look at a government-owned property that is a part of a special housing program. You may also have to save up extra money for a down payment.
3. If the lender agrees, reach out to the homeowners
Since you are trying to acquire a property that has not yet gone through a foreclosure sale, getting the lender to agree won’t be enough. For these homes, distressed but (technically speaking) not quite foreclosed, you’ll also need to talk to the owners who are about to lose their property.
The homeowners are going to be the final major hurdle that you have to deal with. If they are open to it, you might be able to get information from them regarding major repairs you might have to save up for.
You have to get them to agree to sell you the home. Often, this will involve little argument. Most people want to avoid a foreclosure on their credit history, so they’ll agree when they find out it’ll help them avoid foreclosure. Once you get permission, call the lender.
4. Write up the paperwork
This would be a good time to call a real estate agent who has worked with foreclosure purchases before. The agent will help you write up an agreement to purchase with an addendum for loan assumption.
Once you’ve written everything up, get the signatures required from all parties. You’re ready for the next step.
5. Submit everything to the mortgage lender for approval
If the lender doesn’t approve, go back to the drawing board. You might also want to look at homes that are nearing the end of the foreclosure process, foreclosure sale. If the sale is too near at hand to let you work out an agreement with the lender and homeowners, you may want to start arranging financing so you can afford to be the winning bidder at auction. You may also want to look at properties that have gone through foreclosure but failed to sell at auction, lender-owned properties, aka REO properties.
If the lender does approve, it’s time to send this stuff to a title insurance company of your choosing. You’re clear to close, so you can get escrow open and work with your real estate agent, if you have one.
6. Close on the purchase
You get to start working on closing on your home. This means that you will have to meet at the title company’s office with the lenders. They will sign off on everything and give it to a notary. Once everything is cleared, you get to receive your keys.
The lender’s attorney will ensure that you have all the information you need. Once you pay the fees for escrow and closing costs, it’s all official. You’ve got property without a down payment.
Can you always buy foreclosed homes without money?
Assuming the mortgage of a foreclosed or distressed property is not always (or even often) an option. Many lenders prefer to go through the foreclosure sale process instead, simply because they don’t trust people to assume loans. However, in such cases, you may still be able to buy the foreclosed home with no money down with financing.
What other methods can you use?
There are several other ways that you can get a foreclosed property, though they usually require credit checks, a whole new underwriting process, down payments or any combination of these.
These methods include:
- Short Sale. Short sales are approved by lenders as a way to recover costs while the family currently living in the home moves out. They are also a way for underwater homeowners to get out of a property without going through foreclosure. You can get these through a real estate agent in your local market.
- Foreclosed property auctions. Once properties are officially foreclosed upon, they will go to a foreclosed properties auction. Here, you have to bid on them against other real estate investors. You might not be able to do this without a ton of cash on hand or a mortgage approved for the foreclosed property.
- REO properties. Real-estate-owned properties, or REO, are properties that, failing to sell at auction, have become the property of lenders. Another name for them is lender-owned properties. For these, you’ll want to enlist the help of a real estate agent who has experience with buying foreclosed homes. The agent will help you find available properties (most lenders list these in the Multiple Listing Service or MLS), and can help you work with the lender to purchase them.
- Housing and Urban Development programs. Many parts of the country will have specialized county-wide programs that make buying a foreclosed home easier than through typical routes. This may involve a special loan, or properties that are ready to purchase at extremely low prices.
What do you need to try this?
Generally speaking, you need to figure out the closing costs for each home as well as expected monthly payments. This is something that you can usually find out by asking lenders. Unlike doing this through a traditional loan application process, you can skip worrying about credit checks.
Why might lenders reject your loan assumption?
While lenders aren’t quite thrilled about having a foreclosed home on their hands, the truth is that they always retain the right to say no to an assumption. A “no” answer can often be due to the lender’s policy. For instance, there may be a company-wide goal to make more money on loans, even if that means holding onto foreclosed properties until they sell rather than letting anyone assume the defaulted loan.
However, there can be other issues that you might have that make them say no. These can include how much money you have in your checking account, how much debt you have, and if you have enough money to cover a couple of months of payments.
If a lender won’t let you take over a client’s mortgage payments, don’t take it too harshly. That is just the way it sometimes goes when looking at foreclosed homes.
What if you’re not a buyer and just want to avoid foreclosure?
It’s possible you found your way to this article while looking for ways to deal with your own loan default and looming foreclosure. Or maybe you just see default as a possibility given how your finances are going. Avoiding foreclosure could be possible, even without agreeing to a short sale.
In some cases, especially if you just see problems coming and haven’t yet done anything to hurt your credit, refinancing your home could be a solution.
What is the cheapest way to buy a foreclosed home?
Though there are always exceptions, the best way to buy a foreclosed home is usually to go directly to the lender. This usually cuts out the middlemen like real estate agents, real estate investors, or foreclosure listing sites.
Do you need a loan to buy a foreclosed home?
If by “foreclosed home” you mean what most people do, any home that’s entered the foreclosure process, no, you do not need to have a loan to buy foreclosed homes. You may end up with a loan through loan assumption, but that doesn’t involve the same challenges as getting a new loan could. If you have the means, you can also pay in full in cash, of course.
If you buy a home that’s “foreclosed” in the technical sense, meaning it’s finished the foreclosure process and gone through a foreclosure sale, you probably will need a loan. If you buy a home at a foreclosure sale or as an REO property, you’ll need to finance your purchase — unless, of course, you have enough cash to cover it.
Why are foreclosures cash only?
Not all foreclosures are going to be cash only. In fact, there are special loans that you can get for livable foreclosed property. However, some actually will require cash only.
Properties that are cash only tend to be in very bad shape and may require extreme repairs before they can be considered habitable. Since they are in such bad repair, no mortgage lender will back them. If your credit and income are good, you may be able to get any extra cash you need through a personal loan, a line of credit, or a shared equity agreement.
Can you buy a foreclosed home with FHA?
The Federal Housing Administration really wants to see people snapping up homes, even if it isn’t at market value. They currently allow you to get conventional loans, 5-1 ARMs, and FHA loans that are for foreclosed property. They also have a 203 loan that you might want to look into if you are interested in combining a mortgage and a renovation loan.
Why do people agree to let others take their homes?
If you face the threat of foreclosure, you can expect major repercussions on your credit history. Since your ability to either buy or rent property depends on your credit, this makes homelessness a real threat when you go through foreclosure.
Most landlords do not want to rent their rooms out to a family that just went through foreclosure primarily due to the risk of nonpayment. If you don’t have that bad mark, you might be able to find a place to rent.
Depending on the financial situation the family is facing, they may be able to avoid major financial upheaval through the use of an assumption. It can often be better for the homeowner to let someone assume the loan and rent out a place.
- In popular usage, a “foreclosed home” is any home that has entered the foreclosure process. Technically, homes go from being distressed to foreclosed when they sell or fail to sell at auction.
- The best way to buy a distressed or foreclosed home without credit or money on hand is to assume another person’s loan.
- It is up to the owner of the home and the mortgage lender to accept or deny a request for a mortgage assumption.
- If you cannot get a home using loan assumption, you can typically get a short sale (before foreclosure) or an REO property (after foreclosure) instead — though these typically require a down payment to finance the house.
- If the home is not deemed livable, you’ll have to make a cash-only deal.
- To get started, consider looking for distressed homes in your area, via the county clerk’s office.
View Article Sources
- Are you at risk of foreclosure and losing your home? — U.S. Department of Housing and Urban Development (HUD)
- Foreclosure Process — HUD
- How does foreclosure work? — Consumer Financial Protection Bureau (CFPB)
- 9 Steps to Reduce the Threat of Foreclosure — SuperMoney
- A Complete Guide To Home Mortgage Foreclosure — SuperMoney
- How to Finance a House — SuperMoney
- What is a 5/1 ARM? Pros and Cons Explained — SuperMoney
- What is an FHA 203K and How Can I Qualify? — SuperMoney