How to Buy a Foreclosure

The beginner's guide to foreclosure home buying

Basic Tips for First-Time Homebuyers

• Try to get pre-qualified for a home loan. If your credit score is below 700, seek a credit repair service.

• If you have time, hire a contractor and appraiser to inspect the home.

• Run a title search on the property.

• If you are unsure of your ability to purchase a home on your own, hire a real estate agent.

Is Your State Judicial or Non-Judicial?

In a Judicial Foreclosure state: • The lender sues the homeowner in order to

foreclose on the house.• Homebuyers in these states may have to

prove their ability to pay for the home in court.

In a Non-Judicial Foreclosure state: • The lender is able to foreclose without the

consent of a judge. • Home loans with a Power of Sale clause also

allow lenders to forgo the judicial process.

Foreclosure Timeline

In a Judicial Foreclosure state: • The homeowner defaults on the mortgage. • If the debt is not paid back, a Lis Pendens

(LIS) is issued, informing the homeowner of the lender’s intent to sue.

In a Non-Judicial Foreclosure state: • The homeowner defaults on the deed of

trust. • If the debt is not paid back, a Notice of

Default (NOD) is issued, alerting the homeowner of the default.

Foreclosure Timeline

During this Pre-Foreclosure Period, the homeowner has some options to stop foreclosure:• The best option is to pay back the

loan in full. • If this is not possible, the homeowner

may seek loan modification. • Homeowners determined to keep their

homes may file for bankruptcy.• The homeowner may also choose to

sell the home as a short sale.

Foreclosure Timeline

In a Judicial Foreclosure state: • If the homeowner fails to alleviate the debt, the judge

will sign off on a Notice of Foreclosure Sale (NFS).• The home will be listed for sale at auction.

In a Non-Judicial Foreclosure state: • If the homeowner fails to alleviate the debt, the lender

will foreclose. • The property is listed for sale at auction.

This signals the start of the Auction Period.

Foreclosure Timeline

During the Auction Period: • Potential homebuyers can bid on the home on its

scheduled sale date. • Auctions are very fast paced, so attending one as a

spectator first is recommended.

If the home fails to sell at auction, it becomes a Real Estate Owned (REO) property. This may happen if: • The home fails to meet an adequate minimum bid or • The lender is the highest bidder.

Foreclosure Timeline

During the REO Period: 

• The lender may attempt to sell the home itself, especially if the lender is a large bank with a dedicated REO department.

• However, not all REOs are sold by banks. Government agencies that provide home loans, such as HUD, FHA and VA, will often sell their foreclosures on their own.

Benefits to Buying an Auction Home

• Auctions, also known as Sheriff Sales when conducted by a sheriff, are the most common type of foreclosure sale.

• It’s not difficult to predetermine your maximum bid if you research the prices for which similar foreclosures in the area sold. Run a title search and, if there’s time, have the home inspected. You want to subtract the cost of needed repairs and liens from your bid.

Benefits to Buying a Short Sale

• Since the home hasn’t been foreclosed on yet, you’d be helping the homeowner and the lender by providing them with the money to pay off the defaulted home loan.

• Short sales provide plenty of time to have the property appraised and inspected for damages.

• You’ll be allowing the homeowner to walk away from the home with less credit damage than a foreclosure would cause.

Benefits to Buying an REO

• REOs allow homebuyers to buy a foreclosure directly from the bank. Some homebuyers prefer this over buying through the homeowner or buying a home at auction.

• Foreclosures owned by government agencies tend to be very well maintained. This may be a huge plus if you are interested in minimizing the amount of repairs you may need to make as much as possible.

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